Save for Tomorrow, Be Happy Today

by Walter Updegrave,
Monday, September 29, 2008
provided by CNNMoney.com

Another reason to plan hard for retirement: It might cheer you up right now.

In a sense, retirement planning is all about deferred gratification. You live below your means while you work so you can save for a time when you can live however you want. In short, you give up something today so you can live better tomorrow.

But what if preparing for retirement had a more immediate payoff? Wouldn't it be neat if you could enjoy the fruits of your effort now?

Well, maybe you already do. That, at least, is the implication of a recent survey by insurer Northwestern Mutual and health education company LLuminari. The study didn't address retirement per se.

But as the charts below show, people who do the sorts of things that constitute good planning tend to feel happier than those who don't. It appears that the very act of preparing for retirement may deliver a reward now as well as later.

No one is suggesting that getting ready for your post-career days guarantees lifelong bliss or that there's a formula for achieving nirvana. (Save an extra $100 a month and be 50% more fulfilled!)

But the notion that taking steps toward a secure retirement can make you more content is hardly a stretch. Economists, psychologists and others who study happiness find that people who have a sense of control over their lives cope better with stress and live more happily, while those who feel powerless are more likely to be depressed.

Or as the playwright George Bernard Shaw put it: "To be in hell is to drift; to be in heaven is to steer."

So what can you do to make yourself feel better about feathering your nest? Apply these three happiness-linked actions to your retirement planning:

Set Goals

If you fail to set goals early on, you'll be drifting instead of steering. So think about the percentage of pre-retirement income you'll want to replace once you retire - say, 80% to 90%. Then use a calculator like our Retirement Planner to see how much you must save each year to have a shot at reaching that goal. Keep refining your savings target as you near retirement.

Take Steps to Achieve Your Goals

If the amount you're putting into your 401(k) falls short of your savings target, boost your contribution. If maxing out your 401(k) still leaves a gap, you can funnel additional savings into an IRA or tax-efficient options like index funds or tax-managed funds.

Control Debt

It's unrealistic to avoid borrowing altogether. But you can prevent debt from undermining your retirement security by not carrying a credit-card balance. Not only will you avoid onerous interest charges, but the Northwestern study shows that people who are most committed to paying off their cards are almost 20% more likely to describe themselves as cheerful.

So the next time you're trying to decide between a higher 401(k) contribution and a big-screen TV, you might want to go with the option that may make you feel good now and in the years ahead.

Sign up for Walter Updegrave's weekly e-mail newsletter at cnnmoney.com/expert. E-mail him at longview@moneymail.com.

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Volume

Not all technical analysts focus exclusively on price. Many of them think that volume is often times a better indication of where a stock is heading. Volume is simply the number of shares of a stock that are traded over a particular period of time (e.g. 1 day or 30 days). Some technical analysts calculate moving averages for volume, the same way others do for price. Volume is important because it tells how active the stock was during a particular time, which can in turn affect a stock's price. For example, if a stock falls precipitously but volume was exceptionally light that day, this is not necessarily an indication that the stock has fallen out of favor with the market, since the move was caused by a relatively small number of sellers.[



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Bollinger Bands

Bollinger bands on a chart have three lines in them: an upper band, a lower band, and a band at the moving average. The upper and lower bands are placed precisely at two standard deviations above the moving average and two standard deviations below the moving average respectively (standard deviation is a mathematical measure of volatility). Bollinger bands will expand and contract as the market for the stock becomes more or less volatile. If the stock price reaches the upper band, then the stock is thought to be overbought; if it reaches the lower band, then it is thought to be oversold.



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Charts

Charts are the main tool that technical analysts use in order to plot their data and predict prices. Technical analysts may use several different types of charts in order to conduct their tests, including line charts, bar charts, and candlestick charts.

Most of the time, analysts use these charts in order to look for patterns in the data. Some of the more commonly used patterns include:

• Cup and Handle: A pattern on a bar chart that is in the shape of the letter "U" over a period of between 7 and 65 weeks. Once the stock price reaches the second peak of the "U", technical analysts believe that the price will fall as investors who bought at the previous peak start to unload their shares.
• Head and Shoulders: A chart formation in which a price exhibits three successive rallies, the second one being the highest. The name derives from the fact that on a chart the first and third rallies look like shoulders and the second looks like a head. Some technical analysts consider it a sign that the stock will fall further.
• Double Bottom: A chart formation that looks like a "W". Technical analysts aim to buy at one of the troughs and ride the stock higher.
  
  
  

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Momentum

Momentum investors seek to take advantage of upward or downward trends in stock prices or earnings. They believe that these stocks will continue to head in the same direction because of the momentum that is already behind them. The idea relies on the belief that there are a large number of lemmings in the market who will buy whatever stock is already hot. Momentum investors do not necessarily believe that momentum stocks will do well in the long run, but they do think that in the short run people will continue to buy them as they have in the immediate past. This therefore involves a lot of market timing which of course entails a substantial amount of risk. Both moving averages and relative strength can be used in order to determine momentum.



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Relative Strength

Technical analysts use what is called relative strength in order to compare the price performance of one stock to the entire market. The relative strength of a stock is calculated by taking the percentage price change of a stock over a set period of time and ranking it on a scale of 1 to 100 against all other stocks on the market. For example, a stock with a relative strength of 90 has experienced a greater increase in its price over the last year than the price increases experienced by 90% of all other stocks on the market. Some technical analysts like stocks with high relative strength rankings, believing that stocks which have recently gone up are more likely to continue going up. Other technical analysts believe that a very high relative strength can be an indication that the stock is overbought and is ready to fall. Relative strength is really a "rear view window" metric, measuring only how the stock has done in the past, not how it will do in the future.




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Introduction to Technical Analysis

Technical analysis uses a variety of charts and calculations to spot trends in the market and individual stocks and to try to predict what will happen next. Technical analysts don't bother looking at any of the qualitative data about a company (for example, its management team or the industry that it is in); instead, they believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis assumes that market psychology influences trading in a way that lets them predict when a stock will rise or fall. For that reason, many technical analysts are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock
Critics of technical analysis, and there are many, say that the whole endeavor is a waste of time and effort. They point to academic studies like Burton Malkiel's "A Random Walk Down Wall Street" as evidence that there is no possible way to predict future prices using historical prices. Others contend that if any such systems were found to be successful, those who practiced them would be wealthy beyond their wildest dreams, and yet there aren't any billionaire technical analysts (yet).

Technical analysts use dozens of different quantitative metrics in order to predict stock prices. This paper introduce you to some of the most popular ones and explain to you what they're all about, but first here are a few key terms you should know about:

• Support Level: The level that the technical analyst believes a stock price will not fall below (also sometimes called a "floor")
• Resistance Level: The opposite of a support level, the level that the technical analyst believes a stock price will not exceed.
• Breakout: If a stock surpasses the resistance level or falls below the support level, it is said to be a "breakout."
• Advance-Decline Line: The total number of advancing issues minus the total number of declining issues, added to a cumulative total.
  
  
  

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Moving Averages

Perhaps the most commonly used variable in technical analysis, the moving average for a stock is the average selling price for the stock over a set period of time (the most common being 20, 30, 50, 100 and 200 days). Moving average data is used to create charts that show whether or not a stock's price is trending up or down. They can be used to track daily, weekly, or monthly patterns. Each new day's (or week's or month's) numbers are added to the average and the oldest numbers are dropped; thus, the average "moves" over time. In general, the shorter the time frame used, the more volatile the prices will appear, so, for example, 20 day moving average lines tend to move up and down more than 200 days moving average lines.



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Book Value

The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, most companies end up being worth far more in the marketplace than their book value would suggest. For this reason, book value is of more interest to value investors than growth investors. In order to compare book values across companies, you should use book value per share, which is simply the company's last quarterly book value divided by the number of shares of stock it has outstanding.

Price / Book
A company's price-to-book ratio (P/B ratio) is determined by taking the company's per share stock price and dividing by the company's book value per share. For instance, if a company currently trades at $100 and has a book value per share of $5, then that company has a P/B ratio of 20. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. Price-to-book ratio is of more interest to value investors than growth investors.
Price / Sales Ratio
As with earnings and book value, you can find out how much the market is valuing a company by comparing the company's price to its annual sales. This measure is known as the price-to-sales ratio (P/S or PSR). You can calculate the P/S by taking the stock's current price and dividing by the company's total sales per share for the past year (or equivalently, by dividing the entire company's market cap by its total sales). That means that a company whose stock trades at $1 per share and which had $2 per share in sales last year will have a P/S of 0.5. Low P/S ratios (below one) are usually thought to be the better investment since their sales are priced cheaply. However, P/S, like P/E ratios and P/B ratios, are numbers that are subject to much interpretation and debate. Sales obviously don't reveal the whole picture: a company could be selling dollar bills for 90 cents each, and have huge sales but be terribly unprofitable. Because of the limitations, P/S ratios are usually used only for unprofitable companies, since such companies don't have a P/E ratio.
Return on Equity (ROE)
Return on equity (ROE) shows you how much profit a company generates in comparison to its book value. The ratio is calculated by taking a company's after-tax income (after preferred stock dividends but before common stock dividends) and dividing by its book value (which is equal to its assets minus its liabilities). It is used as a general indication of the company's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with ROEs that are high and growing.
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Dividend Yield

The dividend yield measures what percentage return a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock's price. For example, if a stock pays out $2 in dividends over the course of a year and trades at $40, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.

Dividend Payout Ratio
The dividend payout ratio shows what percentage of a company’s earnings it is paying out to investors in the form of dividends. It is calculated by taking the company's annual dividends per share and dividing by its annual earnings per share (EPS). So, if a company pays out $1 per share annually in dividends and it has an EPS of $2 for the year, then that company has a dividend payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends. Companies that distribute dividends typically use about 25% to 50% of their earnings for dividend payments. The higher the payout ratio, the less confidence the company has that it would've been able to find better uses for the money it earned. This is not necessarily either good or bad; companies that are still growing will tend to have lower dividend payout ratios than very large companies, because they are more likely to have other productive uses for the earnings.
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P/E Ratio

EPS is a great way to compare earnings across companies, but it doesn’t tell you anything about how the market values the stock. That’s why fundamental analysts use the price-to-earnings ratio, more commonly known as the P/E ratio, to figure out how much the market is willing to pay for a company’s earnings. You can calculate a stock’s P/E ratio by taking its price per share and dividing by its EPS. For instance, if a stock is priced at $50 per share and it has an EPS of $5 per share, then it has a P/E ratio of 10. (Or equivalently, you could calculate the P/E ratio by dividing the company's total market cap by the company's total earnings; this would result in the same number.) P/E can be calculated for the previous year ("trailing P/E"), for the current year ("current P/E"), or for the coming year ("forward P/E"). The higher the P/E, the more the market is willing to pay for each dollar of annual earnings. Note that last year's P/E would be actual, while current year and forward year P/E would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. For those companies you may want to calculate the price-to-sales ratio

Projected Earnings Growth(PEG)
So is a stock with a high P/E ratio always overvalued? Not necessarily. The stock could have a high P/E ratio because investors are convinced that it will have strong earnings growth in the future and so they bid up the stock’s price now. Fortunately, there is another ratio that you can use that takes into consideration a stock’s projected earnings growth: it’s called the PEG. PEG is calculated by taking a stock’s P/E ratio and dividing by its expected percentage earnings growth for the next year. So, a stock with a P/E ratio of 40 that is expected to grow its earnings by 20% the next year would have a PEG of 2. In general, the lower the PEG, the better the value, because you would be paying less for each unit of earnings growth.



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Earnings

It is often said that earnings are the “bottom line” when it comes to valuing a company’s stock, and indeed fundamental analysis places much emphasis upon a company’s earnings. Simply put, earnings are how much profit (or loss) a company has made after subtracting expenses. During a specific period of time, all public companies are required to report their earnings on a quarterly basis through a 10-Q Report Earnings are important to investors because they give an indication of the company’s expected dividends and its potential for growth and capital appreciation. That does not necessarily mean, however, that low or negative earnings always indicate a bad stock; for example, many young companies report negative earnings as they attempt to grow quickly enough to capture a new market, at which point they'll be even more profitable than they otherwise might have been. The key is to look at the data underlying a company’s earnings on its financial statements and to use the following profitability ratios to determine whether or not the stock is a sound investment

Earnings Per Share
Comparing total net earnings for various companies is usually not a good idea, since net earnings numbers don’t take into account how many shares of stock are outstanding (in other words, they don’t take into account how many owners you have to divide the earnings among). In order to make earnings comparisons more useful across companies, fundamental analysts instead look at a company’s earnings per share (EPS). EPS is calculated by taking a company’s net earnings and dividing by the number of outstanding shares of stock the company has. For example, if a company reports $10 million in net earnings for the previous year and has 5 million shares of stock outstanding, then that company has an EPS of $2 per share. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). Note that last year's EPS would be actual, while current year and forward year EPS would be estimates.
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Fundamental Analysis

Fundamental analysis is a method used to determine the value of a stock by analyzing the financial data that is ‘fundamental’ to the company. That means that fundamental analysis takes into consideration only those variables that are directly related to the company itself, such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the overall state of the market nor does it include behavioral variables in its methodology. It focuses exclusively on the company's business in order to determine whether or not the stock should be bought or sold.

Critics of fundamental analysis often charge that the practice is either irrelevant or that it is inherently flawed. The first group, made up largely of proponents of the efficient market hypothesis, say that fundamental analysis is a useless practice since a stock’s price will always already take into account the company’s financial data. In other words, they argue that it is impossible to learn anything new about a company by analyzing its fundamentals that the market as a whole does not already know, since everyone has access to the same financial information. The other major argument against fundamental analysis is more practical than theoretical. These critics charge that fundamental analysis is too unscientific a process, and that it's difficult to get a clear picture of a company's value when there are so many qualitative factors such as a company's management and its competitive landscape.

However, such critics are in the minority. Most individual investors and investment professionals believe that fundamental analysis is useful, either alone or in combination with other techniques. If you decide that fundamental analysis is the method for you, you’ll find that a company’s financial statements (its income statement, its balance sheet and its cash flow statement) will be indispensable resources for your analysis. And even if you’re not totally sold on the idea of fundamental analysis, it’s probably a good idea for you to familiarize yourself with some of the valuation measures it uses since they are often talked about in other types of stock valuation techniques as well.


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Fundamental Analysis

Fundamental analysis is a method used to determine the value of a stock by analyzing the financial data that is ‘fundamental’ to the company. That means that fundamental analysis takes into consideration only those variables that are directly related to the company itself, such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the overall state of the market nor does it include behavioral variables in its methodology. It focuses exclusively on the company's business in order to determine whether or not the stock should be bought or sold.

Critics of fundamental analysis often charge that the practice is either irrelevant or that it is inherently flawed. The first group, made up largely of proponents of the efficient market hypothesis, say that fundamental analysis is a useless practice since a stock’s price will always already take into account the company’s financial data. In other words, they argue that it is impossible to learn anything new about a company by analyzing its fundamentals that the market as a whole does not already know, since everyone has access to the same financial information. The other major argument against fundamental analysis is more practical than theoretical. These critics charge that fundamental analysis is too unscientific a process, and that it's difficult to get a clear picture of a company's value when there are so many qualitative factors such as a company's management and its competitive landscape.

However, such critics are in the minority. Most individual investors and investment professionals believe that fundamental analysis is useful, either alone or in combination with other techniques. If you decide that fundamental analysis is the method for you, you’ll find that a company’s financial statements (its income statement, its balance sheet and its cash flow statement) will be indispensable resources for your analysis. And even if you’re not totally sold on the idea of fundamental analysis, it’s probably a good idea for you to familiarize yourself with some of the valuation measures it uses since they are often talked about in other types of stock valuation techniques as well.


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Understanding Your Investment Method

How to choose the investment method which relevant for you? Your investment will give you better return if you can choose the best time to buy and sell your investment asset. But, this method which known as market timing is not the simple thing. There is any difficulty in choosing the right time for investing. For example, you think that the stock price in yesterday is very cheap because it has dropped 5 %, then you buy it. But today the stock price is drop again till 10%, and you disappointed why you don’t buy it just today, while you has invested your entire asset.
To solve this problem, you should using investing method of cost averaging. Cost averaging is doing investment regularly and periodically without considering economic and market condition. So, you have no worry if the price of daily needs is increasing while the stock prices are decreasing. With using cost averaging method, you invest with stable amount regularly each month. So you can get lower average of your investment initial amount

Why is it can be happened? Because when the price is up, your holding in an investment will be fewer, while when the price is down, then your holding will has much. If it is averaged, you will get lower buying price. With the tendency of the investment which will grow in long term period, of course you will get profit with this method.
For understanding this further, let’s see the illustration below:
For example, you invest with cost averaging method in stock X for amount USD 50 in the 3rd day each month along 5 months continously. With the changing price in every day, you get the investment illustration below ( with the assumption you buy the stock X per unit)
Month Investment Value (USD) Buying Price Holding Amount (unit)
Feb 50 0.20 250
Mar 50 0.21 238
Apr 50 0.17 294
May 50 0.18 278
Jun 50 0.22 227
Jul 0.23
TOTAL 250 1287

From your investment result, you can get average buying price for amount 0.1942 (0.2+0.21+0.17+0.18+0.22+0.23/5) with stock X unit you hold about 1287 units. Then if you sell all of yor stock units in July, you will gain (0.23 X 1287) – 250 = USD 46,01
Now let’s compare if you invest directly (lump sum) USD 250 in February, you will get buying price for 0.2/unit with holding unit only 1250, then if you sell all of your stock units in July, you will only get the gain for USD 37,50 (0.23X1250)-USD 250.
You have to remember that doing cost averaging method is not guarantee the higher profit you will get compared with other method. With doing market timing, for example you invest all of your USD 250, you will get buying price for 0.17/unit with the holding amount for 1470. If you sell all of yours in July you will get higher profit. (0.23 X 1470) – 250 = USD 88.10. But as explained before, doing market timing not a simple thing, because you could feel that th e right time for market timing is February not April.
Therefore, the cost averaging method is very recommended for long term period, mainly in fluctuating market like stock market, because it can reduce your investment risk


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Annual Report (4)

10-K Reports

All publicly traded companies are required to file a 10-K report each year to the SEC. The 10-K report is similar to the annual report, except that it contains more detailed information about the company’s business, finances, and management. It also includes the bylaws of the company, other legal documents, and information about any lawsuits in which the company is involved. If you are looking for information that you can't find in the annual report, be sure to check out the 10-K.

10-Q Reports (Quarterly Reports)

You can think of quarterly reports (also called 10-Q reports) as abbreviated versions of the annual report that are issued every three months instead of every year. Quarterly reports contain financial statements, a discussion from the management, and a list of "material events" that have occurred with the company (such as a stock split or acquisition).

Form 8-K

Publicly traded companies must file Form 8-K with the SEC whenever any “material event” occurs that might affect the company’s financial condition. The list of material events that must be reported includes stock splits, mergers, management changes, and secondary stock offerings. This information will appear in the subsequent 10-Q, but the 8-K is a faster way to find out about such events.

Proxy Statements

Every year, each publicly traded company holds a meeting at which the company’s business is discussed and common shareholders cast their votes for the Board of Directors. Shortly before each annual meeting, companies send out a document called a proxy statement to each shareholder. The proxy statement contains a list of the business concerns to be addressed at the meeting and a ballot for voting on company initiatives and electing the new Board. This proxy ballot authorizes someone else at the meeting (usually the management team) to vote on your behalf.
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Annual Reports (3)

Cash Flow Statements

The cash flow statement is the newest of the three financial statements; companies have only been required to furnish investors with it since 1988. The cash flow statement is similar to the income statement, except that it dispenses with some of the abstract items found on the income statement (such as depreciation) and focuses on actual cash. Most of the information found on the cash flow statement is contained in either the income statement or the balance sheet, but here it is organized in such a way that it is difficult for companies to use accounting tricks to obscure the facts. The cash flow statement is broken down into three parts:

• Cash Flows from Operating Activities: Here you'll find how much money the company received from its actual business operations. This does not include cash received from other sources, such as investments. To calculate the cash flow from operating activities, the company starts with net income (from the income statement), then adds back in any depreciation expenses, deferred taxes, accounts payable and accounts receivables, and one-time charges
• Cash Flows from Investing Activities: This section shows how much money the company has received (or lost) from its investing activities. It includes money that the company has made (or lost) by investing its excess cash in different investments (stocks, bonds, etc), money the company has made (or lost) from buying or selling subsidiaries, and all the money the company has spent on its physical property, such as plants and equipment.
• Cash Flow from Financing Activities: This is where the company reports the money that it took in and paid out in order to finance its activities. In other words, it calculates how much money the company spent or received from its stocks and bonds. This includes any dividend payments that the company made to its shareholders, any money that it made by selling new shares of stock to the public, any money it spent buying back shares of its stock from the public, any money it borrowed, and any money it used to repay money it had previously borrowed.
• Free Cash Flow: While free cash flow doesn't receive as much publicity as earnings do, it is considered by some experts to be a better indicator of a company's bottom line. Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. Whereas earnings reports are subject to a number of different accounting tricks which can artificially boost the bottom line, free cash flow is not. It is quite possible, for example, for a company to have positive earnings and negative free cash flow. Negative free cash flow is not necessarily an indication of a bad company, however; many young companies tend to put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, you should probably be investigating why it is doing so and what sort of returns it is earning on its investments.

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Annual Reports (2)

Balance Sheets

The second financial statement that you'll encounter in the annual report is the balance sheet. The basic concept underlying a balance sheet is simple enough: total assets equals total liabilities plus equity. A lot of investors tend to focus on the income statement, but the balance sheet is just as important a source of information. You can use the balance sheet to determine the firm's liquidity, to see how leveraged the company is, or just to see all the specific assets and liabilities of the company. The following list will teach you how to read a balance sheet and use the information from it to find out the company's current financial standing.


•Current Assets are the first numbers you'll encounter on the balance sheet. Current assets are defined as assets that can or will be converted into cash quickly (generally within one year). Current assets include, of course, cash and cash equivalents (money market accounts, etc.), but it also includes the company's inventories (unsold stock) and its accounts receivable (uncollected bills from its debtors).
• Current Liabilities are the opposite of current assets. They are the money that the company expects to pay out within the next year. Current liabilities include accounts payables (bills the company must pay), interest on long term debt, taxes, and dividends.
• Non-Current Assets and Liabilities are assets that cannot be turned into cash quickly or liabilities that are not due for over a year, respectively. This includes assets such as the company's plants, property, and equipment, and liabilities like long-term loans.
• Ratios and Other Calculations can be calculated to analyze the balance sheet, just like you can calculate several different types of margins to help you analyze a company's income statement.
o Debt/Asset Ratio: The debt/asset ratio can show you what percentage of the company's assets are financed through debt. You can calculate it by taking total liabilities and dividing by total assets. If the ratio turns out to be less than one, then that means that most of the company's assets are financed through equity. If the ratio turns out to be greater than one, then the company is financing most of its assets through debt. Companies that have high ratios are said to be "highly leveraged." This means that they are carrying excessive amounts of debt and could be in danger if creditors start to demand repayment.
o Current Ratio: The current ratio is the opposite of the debt/asset ratio: it takes the total number of current assets owned by the company and divides by its total current liabilities. If this number is greater than one, then the company has enough current assets to cover its short term liabilities. A number that is much higher than one, however, might indicate that the company is hoarding its assets instead of putting them to use. A number less than one indicates that the company may experience problems with liquidity.
o Acid Test: The acid test ratio is similar to the current ratio except that it subtracts out inventory from current assets. To calculate this ratio, you take current assets minus inventory and then divide by current liabilities. The reason why the acid test disregards inventories is because in many industries inventory is not easily liquidated into cash; thus it can't be used to pay off short term debt.
o Shareholder Equity: Shareholder equity is equal to total assets minus total liabilities. This number shows you what part of the company is owned by the shareholders after all of its obligations have been met.
o Working Capital: Working capital is calculated by subtracting the firm's current liabilities from its current assets. This number shows you how much in liquid assets the company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have lots of working capital will be more successful since they can expand and improve upon their operations. Companies with negative working capital may lack the funds necessary for growth.
o Turnover Ratio: The turnover ratio is used to determine how many times a company "turns over" its inventory in a given year. It is calculated by taking the cost of goods sold and dividing by the average inventory for the period. A high turnover ratio is looked upon favorably because it is a sign that the company is producing and selling its goods or services very quickly. A low turnover ratio indicates that the company has large warehouses of inventory going unsold for long periods of time.
o Leverage: Financial leverage is a measure of how much debt the company has assumed in order to finance its assets. It is calculated by dividing the amount of long-term debt carried by the company by the company's total equity. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad, however; it can increase the shareholders' return on their investment and often there are tax advantages associated with borrowing. The important thing is to be able to differentiate between a healthy amount of debt for good purposes and too much debt for questionable purposes.


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Annual Reports (1)

How you read an annual report depends upon your purpose. As an investor, your purpose may be to assess profitability, survivability, growth, stability, dividends, potential problems, risks or other factors which may affect your investment in that company. The annual report provides a convenient way to monitor the progress of a company.
Annual reports are a corporate "work of art" and should not be read like a normal book. There is no need to read the report cover to cover. The first pages are a colorful, non-technical overview of the company's objectives and how well it's meeting them. This should be taken with a grain of salt, because it's marketing literature from the company, designed to put their best foot forward. The pages in the back are for number-crunching and heavy-duty research. Reading annual reports together year to year creates a kind of timeline for the company. You can learn a lot by reading about how the company changed their business model or carried out their desired plans from one year to the next.

There are nine sections in most annual reports. Not all reports will have all the sections or the same type and amount of information. Here are the sections, what you'll find in each, and questions you should ask yourself:
• Chairman of the Board Letter: Should cover changing conditions, previous objectives met or missed and upcoming objectives, and actions taken or not to be taken. Is it well written? Read between the lines; what is being apologized for?
• Sales and Marketing: Should cover what the company sells, how, where and when. Is it clear where it's making most of its money presently? Is the scope of lines, divisions and operations clear?
• 10 Year Summary of Financial Figures: Is this included? Have revenues and profits increased each year?
• Management Discussion and Analysis: Is it a clear discussion of significant financial trends over the past few years? How candid and accurate is it?
• CPA Opinion Letter: Written by the CPA firm as an opinion on the company's financials. Is it a well-respected firm? What did they have to say about the company's numbers?
• Financial Statements: Check sales, profits, R&D spending, inventory and debt levels over time. Read the footnotes to ferret out other information.
• Subsidiaries, Brands and Addresses: Where is their headquarters? Is it clear what lines, brand names the company has and what their overseas distribution network is?
• List of Directors and Officers: How many directors are insiders and how many are outsiders (a good mix is ideal)? Are the directors well-known and respected? Are there an unusual number of directors (5 to 12 is typical)?
• Stock Price History: General trend of price over time. Up or down? On which exchange is the company listed? Do they have a history of paying dividends?
• Financial Statements: Most of the information you’ll be concerned with in the annual report is located in the financial statements (the balance sheets, the cash flow statements, and the income statements),
• Income Statements

The income statement (sometimes called the profit-and-loss statement or P&L) is the first financial statement that you’ll find in the annual report. It shows the revenue, expenses and profit for the company during the past year. You can use the income statement to figure out cash flow, profit margins, and other financial metrics for the business. Most importantly, though, the income statement contains the proverbial bottom line: profits.

You should be careful when looking at the income statement since companies can sometimes engage in gymnastics with their accounting methods. The statements are audited by outside firms, however, so there should be footnotes or other markers whenever anything deviates from standard accounting practices. The following list will teach you how to read an income statement and use the information from them to make some simple calculations regarding the firm's operations.
• Revenues: The revenue section will tell you how much money the company took in for a specified period of time. Sometimes companies will break down revenues according to business sector or geographic region, but usually there will just be one number. Some companies, especially retailers and manufacturers, use the term sales instead of revenues, but it's the same idea.
• Expenses: The expense section will show you how the company spent its money. Companies spend their money on a lot of different activities, so this section is usually broken down into specific sub-sections. You might see expenses such as the following:
o Cost of Sales: This number includes expenses directly associated with creating revenue, such as labor and materials.
o Operating Expenses: This number includes activities such as marketing, research and development, and administration. It usually also includes depreciation expenses and any special non-recurring charges.
o Interest Expenses: This figure includes all the interest the company paid out on its bonds (if any) and/or long-term debt.
o Taxes: The amount of money paid in taxes by the firm.
o Extraordinary Expenses: This figure shows any unusual or one-time charges that the firm must pay (e.g. a lawsuit settlement).
• Profit: The profit section of the income report is the part to which investors pay the most attention. It shows whether the company made money or lost money. It usually includes these specific sections:
o Net Income: This is the company’s bottom-line profit after all expenses and revenues have been accounted for. If this number is positive, then the company turned a profit for the period. If it’s negative, then the company suffered a loss.
o Number of Shares: This is the average number of shares outstanding during the specified time period; it is used primarily in order to calculate earnings per share. Two numbers are usually reported here: basic shares and diluted shares. Basic shares include only actual shares of stock outstanding, whereas diluted shares include any securities that could possibly turn into stock (such as convertible bonds or stock options).
o Earnings Per Share: This number is calculated by taking net income and dividing by the number of shares (both basic and diluted, so there are two earnings per share figures).
• Margins: You can find out how much a company is really earning from its revenues on the income sheet by calculating its margins, which are earnings expressed as a percentage of sales. Here are a few margins that you might find useful:
o Gross Margins will tell you how much a company earns taking into consideration the costs that it incurs for producing its products and/or services. In other words, gross margin is equal to gross income divided by net sales, and is expressed as a percentage. Gross margin is a good indication of how profitable a company is at the most fundamental level. Companies with high gross margins will have a lot of money left over to spend on other business operations, such as research and development or marketing.
o Net Margins are similar to gross margins, except they take into account all of the expenses associated with the business, including marketing expenses, administrative expenses, etc. (so it is equal to net income divided by net sales). Net margins provide an overall picture for the company; this is what shareholders and investors usually watch most carefully. Low (or negative) net margins might indicate that the company is struggling or is in a competitive industry in which it doesn't have very much power to dictate its prices.


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Earnings Estimates

In addition to issuing buy, hold, and sell recommendations, analysts also issue earnings estimates for companies. These earnings estimates are earnings per share numbers that the analyst believes a particular company will report in its next quarterly statement Earnings estimates have become increasingly important on Wall Street in recent years, as companies that “beat” the estimates typically see their stock prices rise while those that do not usually watch them fall.

But earnings estimates and reports are subject to conflicts of interest. In an all-too-common practice, companies will guide analysts toward earnings numbers that are lower than what the company actually expects to report. As a result, companies often exceed expectations, which unsophisticated investors look at as a sign to buy. While the SEC is trying to reduce such abuses, you should still garner whatever earnings information you can from unbiased sources, such as the so-called “earnings whispers” or "whisper numbers". Earnings whispers are intended to help investors avoid being duped by misleading estimates. They are created using a variety of methods (such as polling individual investors or enlisting the help of independent, unbiased analysts), and are often more accurate than Wall Street's estimates.

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Analyst Reports and Recommendations

Wall Street investment firms employ thousands of analysts whose job is to issue reports and recommendations on specific stocks. These analysts typically look at the company's fundamentals and then build financial models in order to project future trends, most notably future earnings they then use these projections as a basis for issuing recommendations on whether or not they think the stock should be bought or sold. Analyst recommendations vary from one firm to another, but usually they resemble something along the lines of "strong buy," "buy," "hold," and "sell." Many investors take these recommendations quite seriously, and you'll notice that often times when an analyst changes his or her outlook on a stock the price will rise or fall immediately.

You should be careful when looking at analyst recommendations for several reasons. First of all, many analysts suffer from a conflict of interest between the firm that employs them and the company whose stock they track. Often times, an analyst will be responsible for issuing reports on a company that is a current or potential client of their employer (usually an investment bank). Since they know that their employer would like to keep the client's business, the analyst may be tempted to issue a rosier outlook for the stock than what it really deserves. You should also be careful regarding the actual recommendations themselves. There are very few "sell" recommendations issued; "buy" and "strong buy" are much more common, so much so that "buy" is sometimes interpreted to mean "not good enough for a strong buy, so not worth buying". Again, analysts do not want to offend any company that could be a potential client for their bank (which is every company), so many analysts put a positive spin on even the gloomiest of stocks.
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Brokerages in Stock Trading/Investing (continues...)

Discretionary Accounts
Discretionary accounts are a special type of brokerage account that permit the broker to buy and sell shares for you without first contacting you for approval. You can also set up a discretionary account with an investment advisor who can make the same unauthorized transactions. If you’re going to set up a discretionary account, it’s probably a better idea to do so with your financial advisor as the authorized party since they (at least in theory) are supposed to be trying to maximize your financial well-being. Brokers, on the other hand, are not responsible for making you money; they are responsible for making themselves money and so they might make frequent unnecessary transactions in order to boost their commission.
Broker Research
Before sitting down to decide which broker you want to open an account with, you should probably do a little bit of research about the person who will be handling your transactions. One way to find out about a broker’s background is to call the National Association of Securities Dealers (NASD), a self-regulatory agency of brokers. The NASD can tell you, for free, whether your broker has ever been convicted of a securities-related crime or whether disciplinary action has been taken against him or her.



The other major resource that you can use to find out about your broker is the Central Registration Depository (CRD) system, a computerized database that has information on over 600,000 registered stockbrokers. The CRD can tell you about the broker’s employment history, his or her securities examination scores, licensing information, and any record of disciplinary action. In order to access the CRD, simply ask your prospective broker for his or her CRD number and then contact your state securities commission or the NASD.
Choosing a Broker
When choosing a brokerage, be cautious of advertising, especially the advertisements with comparisons of commission schedules. Instead, focus on objective ratings and use the list of considerations below to help you make your decision:

• Commission rates: especially for the types of trades you typically make.
• Range of services: make sure they offer everything you need (for example, if you will be trading foreign stocks, confirm that they are equipped for this).
• Quality of service: check the Better Business Bureau, NASD Regulation or your state attorney general's office for complaints. 

• Minimum to open an account 
• Account protection: confirm that they are SIPC insured. This will cover you for up to $100,000 in cash and $500,000 in securities. If you need more, discuss it with the broker. 
• Fees and investment options for IRAs 
• Margin rate (if you plan to buy on margin) 
• Money market account yield 
• Commissions on no-load mutual funds 
• Inactivity fees
• How long you have to wait on hold when calling
• Local offices
• Other services (check writing privileges, credit cards, etc.) 

When choosing an online broker, the following extra considerations are important:

• Use of a secure server to handle all transactions. 
• Types of investment vehicles: stocks, options, bonds, futures, mutual funds, foreign securities. 
• Types of orders that can be placed. Most allow market orders, stop orders, and limit orders. 
• Order execution speed. Some brokers use "drop copy" trading, in which a live broker reviews orders before they're executed, which can delay the trade by up to ten minutes. 
• Order confirmation speed. 
• Support, preferably by both phone and email, and preferably 24-hour. 
• Amount of account information (and speed with which it's updated). 
• Free or cheap real time quotes. 
• Free or cheap research, market data and news, portfolio tracking, alerts, and planning tools. 

It’s a good idea to narrow down your list of potential brokers to a few that seem to meet your needs, and then to open demo accounts with each to see which you like best.

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Brokerages in Stocks Trading/Investing

Introduction
The most common way for you to purchase a stock is through a broker. Actually, the “broker” that you deal with is technically called a “registered representative” or an “account executive” and the company that your account executive works for is called a broker-dealer. For simplicity’s sake, in this section we will just use the word “broker” in the popular sense, to refer to the person that you tell to purchase or sell your securities.
Commissions and Fees
Brokers and brokerages (the companies that employ brokers) make money primarily by charging commissions. A commission is a fee that you, the customer, pay a broker in order to execute a transaction for you. The reason why you must go through a broker and pay this fee in order to trade a stock is because you yourself do not have access to the stock exchanges. Brokerages, however, have seats on the various exchanges and so they will trade your stock for you in exchange for a small (or sometimes large, as the case may be) commission. Brokerages also charge a number of other fees, such as for transferring funds into and out of an account. Since fees and commission vary from broker to broker, the best idea is for you to shop to around to see for what each brokerage charges.
Cash Accounts
The cash account is the most common type of account used at brokerages. As the name suggests, cash accounts are accounts into which you place your money in order to make a trade. You either must have enough money in your account to cover the trade at the time of its execution (including both the price of the security and the commission), or you must be able to pay for the trade within three days (this is called the settlement date). Some brokerage firms are now beginning to accept credit cards to fund cash accounts, but the overwhelming majority still require cash or a personal check.



Margin Accounts
Unlike a cash account, a margin account allows you to buy securities with money that you don’t have. How is that possible? You simply borrow the money from your broker. The Federal Reserve limits margin borrowing to at most 50% of the amount invested (so, for example, if you want to buy a share of stock for $100 you can borrow $50 at most on margin and you must pay the other $50 yourself). Some brokerages have even stricter requirements, especially for volatile stocks. People open margin accounts mostly to take advantage of an opportunity to leverage their investment, not because they don’t have the money to make the full purchase By only putting up half the money for the purchase, investors realize a higher return if the stock rises (for example, using the preceding example, if the stock price doubles to $200 then the investor has actually quadrupled his or her original $50 investment; if s/he had put up the full $100 the investment would only have doubled in value). Brokerages charge a relatively low interest rate on margin loans in order to entice investors into buying on margin.
As with any investment technique, there are downsides to buying securities on margin. Although buying on margin can give you the opportunity to make more money than normal, it can also lead to larger than normal losses, especially if the broker issues what is known as a margin call. A margin call is basically a call for the investor to repay the loan right away, within 24 hours. They are usually issued when the value of the investment drops below the amount that has been borrowed. In this case, the broker will want you to sell the security immediately in order to pay off your margin loan, which of course would leave you with nothing from your original investment.

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Secret to Retire rich

How to retire rich? Is it any secret to make us retire in rich?
Many people often delay investment and they always have any reason for delaying. The reason which they often said are they having not enough fund to invest, they have not know the ways to invest and another reason. In the other hand, investment is the important thing which everybody knows it. But, there a lot of people who invest but only a little of them who become rich. Why it can be happened? The answer is because they assume investment as same as saving.
Saving versus investing. What the difference? Usually saving is purposed to fund something, e.g. holiday trip. When your saving is enough, then you will withdraw it and spend it for that holiday. After the holiday, no more fund rested and you have to save again.

Meanwhile, investing is building wealth. It need something different and need times. Man who wants to live prosper in his retirement age will invest his fund in long term period and usually invested in growth asset like stocks and bonds. If the value of asset has grown you can withdraw it as an income, while the capital still exists. Or you can reinvest it until your wealth continues growing and gives you more income.
Investing needs patience but the result will be gained after. Along the time, investment you did, will grow and grow and in the further will make you retire rich.
When you decide to quit from your job, you will change your investment strategy. At the time, you will start to withdraw investment asset. But the most important thing is the usage of that fund must be relevant with your needs in order to be available as long as your retirement period. Happy investing for your rich retirement!
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Plan Retirement with Investing

Are you ready to retire? Do you want to retire rich? What kind of efforts will make you retire in wealth? Is the investment can do something to realize your wish? what kind of investment you will choose in order to retire rich? Is it stock trading or investing? Mutual funds? You could find the answer with exploring this site...



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Understanding Your Goals

from: www.aarp.org/

To become a successful investor, you need to understand your goals before you can make decisions that fit those goals. By aligning investment strategies with your individual needs and long-term financial plan, you'll have a much better chance of reaching your goals by creating a well-rounded investment portfolio.

Before you consider individual investments, ask yourself these questions:

• Where do I want to be, financially? Your goals may include things you want to buy, security in retirement, or planning for a child or grandchild's education.
• How will I get there? To achieve your goals you need a strategy. It should be based on whether you want to protect your money, grow it, earn income from it, or achieve some combination of all three.
• When do I want to accomplish my goals? Different timeframes normally require different strategies.
• What will get me there? Certain investments may be better suited than others, or have greater potential, to help you achieve your goals.
• What risks could be involved? Based on the strategy you choose, you will encounter specific risks. You must assess each risk to see whether it can be managed (controlled and reduced) and whether it's worth accepting.
  

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A Brief on Trading Stocks

Before you start trading stocks, it's a good idea to understand the process of trading. Most buyers in this country are accustomed to retail shopping, where the prices are set beforehand by the seller. The stock market operates more like an auction, in which both buyers and sellers are actively setting the prices at the same time. I will discuss how trading works, the different types of trading orders you can execute, and the different systems that you can use to place your orders.
Both buyers and sellers actively set prices in the stock market. Not surprisingly, then, there are two prices associated with every stock: the bid price and the ask price. The bid price is the price at which buyers say they will purchase the security; the ask price is the price at which sellers say they will sell the security. The bid and the ask prices are rarely, if ever, the same: generally, the bid is slightly below the ask. The difference between the two is what is known as the spread—this is the amount that is taken by your broker as profit. Specialists, who are in charge of the coordination of the buying and selling of a certain stock, pair bids and asks together to streamline the process and keep the spread small but positive

Since the bid and ask prices of a stock are in constant fluctuation, you need to be careful about your sales and purchases. The price that you see quoted may or may not be the price at which you actually buy/sell the stock. For instance, you may look on the internet and see that your stock is selling for a certain price and decide that it's time for you to sell. However, you might also get distracted by something immediately afterwards, so a little bit of time elapses before you can contact your broker to tell him/her to sell your stock. Then your broker has to relay the order down to his/her representatives on the trading floor assuming the stock trades on the NYSE or Amex. By the time your trade is actually executed, the price of the stock might have slipped from what you thought it was, and you're left with less cash than you had anticipated.
Sound scary? Fortunately, trading does not have to work that way. The good news for you is that you have many options regarding the method of execution for your trades. In the above example, you would have been using what is known as a market order. Market orders definitely have their uses, but you should be aware of all of the following types of trades:

• Market Orders: As mentioned above, you tell your broker to purchase or sell a specified quantity of stock at the prevailing market price. These are often the lowest-commission trades because they involve very little work on the broker's part. 
• Limit Order: You tell your broker to buy a security at or below a specified price, or to sell a security at or above a specified price. This ensures that you will never pay more for the stock than whatever price you set as your "limit." 
• Stop Order: You tell your broker to buy a security at the market price once it reaches a level higher than the current market price. The opposite would be true if you were selling: you would tell your broker to sell your security once it reaches a level below the current market price. 
• Fill or Kill: You tell your broker to execute the trade immediately; if the trade is not filled right away then your broker does not execute the order. 
• Day Order: You tell your broker to execute the trade by the end of the day; otherwise, he or she does not fill the order. 

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Investing, Now or Later?

We have known that investing is different from saving. Saving means save your money without hoping some increase from value of your saving money. Meanwhile, investing means hoping some increase from value of your money along the time and in the future will give you any profit.
When we have to start investing? The most important thing in investing is everyone has to know his investing target and investing period. Everyone has targets and wishes e.g. buying car, having home, sent his children to the school, religious tour etc.

With setting the investment period, you should know how you invest your money, for example:
1) For who invest in the short term period will tends to choose the investment in cash type in order to get it back in 1- 3 years later.
2) For the long term investor will tends to choose type of investment which has tendency for asset growth like stocks.
Whatever your investment profile, do it from now! Time is the best friend of investment. The time can grow your asset. The longer the period of your investment, the bigger amount you can reach it as your investment return. So, don’t wait until you don’t have a chance to start saving and investing your asset. Just do it now!

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Asset Allocation

from: http://www.domini.com/learning-planning/Asset-Allocation/index.htm

Investors can allocate their money among three major asset classes -- stocks, bonds, and cash -- and numerous subcategories within those asset classes.

Asset allocation is important because it determines how risky an overall portfolio is. If all of a portfolio's assets are concentrated in one area, such as stocks, it is likely to be more risky than a portfolio whose assets are spread out among diverse investment categories.
An asset allocation appropriate to an investor's goals and time horizon provides the best chance that an investor will meet his or her financial goals. In addition, an investor should examine his or her overall financial resources and personal ability to tolerate risk when making asset allocation decisions.

Diversification
Most investors are concerned about the risks associated with financial markets; namely, that their investments will lose money or will not grow enough over time to outpace inflation. Diversification is an important strategy used by investors to help reduce this risk.
Because the markets for stocks, bonds, and cash do not all move in the same direction or to the same degree, an investor's portfolio that combines these asset classes should be less risky than one that includes only one type of investment. A diversified portfolio historically produces better returns than one that is concentrated in more conservative asset classes, such as short-term bonds or cash equivalents. A diversified portfolio is also less likely to experience stomach-churning volatility than one concentrated in the most aggressive investments, such as small-cap or emerging-markets stocks.
Investors normally try to reduce risk by diversifying their exposure by asset class (stock, bond, cash equivalents), as well as their holdings within an asset class (for example, stock holdings may be diversified among large-cap stocks and small-cap stocks).

Investment Goals and Time Horizons
People invest for a variety of reasons. Some want to buy a new car next year; others are saving for a down payment on a house that they plan to buy three years from now. College tuition looms on the horizon for many families, and of course, there is retirement, which is the biggest investment goal for most individuals.

All investment goals have a time horizon, which is the length of time between now and when the money being invested will be spent. For example, if you are saving to buy a new car next year, your time horizon would be a short one. If you are saving for a down payment on a house, your time horizon might be medium-term, say three years. If you are currently 40 years old and saving for retirement, you have a long-term time horizon of about 25 years. Over time, of course, long-term goals such as retirement or funding your child's college education will become medium- and short-term goals. As your time horizon shifts, your asset allocation should shift accordingly.
For the most part, investments offering the greatest growth potential also pose the greatest risk. An investor with a short time horizon might want to minimize or avoid higher risk investments such as stocks or stock funds, because the growth potential offered by these investments over time can be offset by short-term volatility. If your time horizon is sufficiently short, say three to five years, you may wish to concentrate on more stable investments such as bond funds, or even money market accounts.
While bond funds offer no guaranteed rate of return, they are generally less volatile than stocks and usually offer greater returns than money market accounts or other cash equivalents. Those with a longer time horizon can generally afford to invest more aggressively because short-term volatility will usually be overcome by long-term growth. For long-term investors, the growth potential offered by stocks tends to offset the effects of inflation.
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Types of Mutual Funds

from: http://www.domini.com/learning-planning/Mutual-Fund-Basics/Types-of-F/index.htm 
Stock Funds
Stock funds, also called equity funds, invest primarily in the shares of publicly traded companies. Domestic (or U.S.) stock funds invest primarily in companies based in the United States. International stock funds invest primarily in companies based outside the United States. Global stock funds invest in companies based both in the United States and elsewhere around the world.
Most domestic stock funds have more specific investment objectives. Many invest based on companies' market capitalizations — small-cap, mid-cap, or large-cap. (A company's market capitalization is its total stock value.) Large-cap stocks do not normally fluctuate as greatly as small-cap stocks, but also do not normally have as much growth potential.

Most funds also invest according to a particular style, such as "growth" or "value." A growth fund focuses on companies with above-average potential for profit growth, while a value fund looks for companies with stock prices that appear to be a bargain given a company's growth prospects. A "blend" fund tends to take the middle ground between value and growth.

Bond Funds
Bond funds invest primarily in fixed-income securities issued by companies and governments. Most bond funds invest in debt instruments of American companies and governments, but international bond funds invest outside the U.S.

In general, a bond fund's investment objective takes into account both maturity, or the length of time until the principal is due on its bonds, and credit quality. Some funds invest in long-term bonds that mature in 10 to 30 years, others invest in intermediate-term bonds that mature in 4 to 10 years, and some invest only in short-term bonds that mature in 1 to 4 years. Most funds invest in government or corporate bonds that are of high credit quality, or "investment-grade." Those that focus on more risky lower-grade bonds are called "high-yield" or "junk" bond funds.

The total return for a bond fund consists of both interest income and price appreciation (or depreciation). Interest income, often expressed in percentage terms as "yield," is the interest paid on the bonds held by the fund. The actual value of the bonds can rise or fall, depending on market conditions. The prices of bonds tend not to fluctuate as greatly as those of stocks.

Other Types of Funds

• Balanced Funds invest in a combination of stocks and bonds.
  
• Sector Funds are stock funds that focus on a particular economic sector, such as technology or health care.
  
• Municipal Bond Funds are bond funds that invest in tax-free municipal bonds, which tends to be beneficial to investors in higher tax brackets.
  
• Money Market Funds are funds that invest in very short-term cash-equivalent securities (not to be confused with Money Market Accounts, which are insured and issued by banks). The Domini Money Market Account is not a Money Market Fund; it is an insured Money Market Account with ShoreBank.
  

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What Is A Mutual Fund?

http://www.domini.com/learning-planning/Mutual-Fund-Basics/index.htm

A mutual fund is a portfolio, or collection, of individual securities (some combination of stocks, bonds, or money market instruments) managed according to a specific objective spelled out in the fund's prospectus. A mutual fund allows investors to pool their money, then the fund invests it on their behalf.

Unlike individual stocks, whose value fluctuates minute by minute, mutual funds are priced at the end of each day the market is open, based on what the securities in the portfolio are worth. The price per share, or net asset value (NAV), of a mutual fund is the current market value of the fund's net assets divided by the number of shares outstanding. Investors buy and sell shares in the fund based on its NAV as of the next market close.


Why invest in a mutual fund?

Diversification
Diversification is one of the key reasons for investing in mutual funds. Most investors are concerned about the risks associated with financial markets; namely, that their investments will lose money or will not grow enough over time to outpace inflation and meet their future financial needs. While the risks of the stock market cannot be eliminated, there are various strategies used to reduce the level of risk. One such strategy is diversification. With a single investment in a stock or bond, an investor essentially has all of his or her eggs in one basket. With a mutual fund investment, by contrast, an investor typically gains exposure to dozens of securities, thereby spreading risk across a range of securities. Assuming that the mutual fund's portfolio is itself properly diversified, the Fund's value should not fluctuate as widely as the price of an individual stock. Beyond that, an investment in several mutual funds that have different investment objectives can result in even broader diversification. Some mutual funds that have only a few stocks in their portfolio or focus solely on particular sectors (i.e., technology or healthcare) are considered non-diversified. An investor would have to invest in several non-diversified funds to achieve diversification and reduce certain risks. 

Professional Management
Mutual funds are managed by investment professionals, who have the knowledge and expertise to buy and sell securities that fit the investment objectives of the fund. Most fund managers have extensive educational and professional credentials and years of experience managing money.

Simplification
For an individual investor, buying and selling individual stocks or bonds can be complicated, requiring extensive knowledge of financial markets, expensive, because of brokerage costs, and time consuming. Mutual funds greatly simplify the investment process by providing investors a ready-made professionally managed portfolio at a reasonable cost. Mutual fund shares can also be readily bought and sold at a price calculated daily - the Net Asset Value per share (or NAV). Some mutual funds charge a "load" or sales charge to invest (a "front end load") or sell your shares ("back end load"). All of the Domini Funds are "no load" meaning that there is no fee charged to invest in our funds, or to sell your shares.

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Retirement and Mutual Funds

from: http://www.retirementmutualfunds.com  
Retirement and mutual funds seem to go together like bread and butter. Mutual funds are when people pool their money together and use it to buy securities. These investors each own shares in the mutual fund in direct portion to the amount they have invested. Each share represents ownership of part of securities owned by the mutual fund. The price of a share is based on the current value of the fund's investments. If the fund's investments increase in value, then the fund share price rises. Conversely, if the fund's investments decrease in value, then the fund share price declines.
At the end of every trading day, the fund totals the value of all the securities in its portfolio and divides the portfolio value by the number of shares outstanding. This gives you the mutual fund's net asset value (NAV) - the price of a single share of the fund. See the formula below.
(NAV = Total Value of Assets Owned by a Fund - Fund Liabilities )/Number of Shares Outstanding

Mutual funds have many advantages and disadvantages. The biggest advantage to investing through a mutual fund is its diversification. Fees, on the other hand, are a fund's largest disadvantage. Fees are used to pay professional money managers to direct the mutual fund. Fees charged by mutual funds vary. Legally a mutual fund can charge each of the following fees as long as it lists it in its prospectus.
Sales load (also called a front-end load): This fee takes a portion of your money upfront before investing the rest in its fund. [For example: You have $1,000 to invest. The mutual fund charges a 3% sales load. Thus, only $970 in actually invested in the fund].
Redemption fee (also called a back-end load): this fee takes a portion of your money when you sell your shares of the fund. [For example: Your shares are valued at $1,000. The mutual fund charges a 5% redemption fee. Thus, you only receive $950].
Management fees. These fees are an annual fee paid to the professional money manager who directs the fund's investments. [For example: You have $1,000 invested in a mutual fund on December 31st, which has a management fee of 1%. Thus, on January 1st, you will only have $990, because of the management fee].
12b-1 fees. These are fees charged by the mutual fund to provide information to potential investors (i.e. an advertising fee). [For example, you have a $1,000 invested in a fund with a 0.50% 12b-1 fee. You will have only $995 after the fee is deducted from your account].
An alternative to investing in mutual funds for your retirement is joining an investment club. Investment clubs are a group of people who pool their money to buy securities, just like mutual funds. These groups meet on a regular basis, either in person or online. During these regular meetings, the members of the club socialize, study stocks and learn about investing and personal finance. They offer all the advantages of a mutual fund, but less the fees that can quickly drain a portfolio.
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A Brief on Mutual Fund

Did you know mutual fund? Some people say it as unit trust or trust fund. What is mutual fund? Mutual fund is kind of investment instrument you should consider to choose it for your retirement planning. Why? Because mutual fund gives you better return rate in long term period than you save money in time deposit. Are you desired to retire rich? You can choose mutual fund as your alternative investment instrument.
What is exactly mutual fund means? Mutual fund is an investment instrument which collecting investor funds to be invested in some stocks, bonds and money market instrument that done by investment manager. Because of the big amount of funds then the mutual fund can be invested in stocks, bonds and money market instruments, in spite of the investor didn’t has big fund.

If you buy a mutual fund, then you will get some trust unit in the day you buy the mutual fund. What is the trust unit? Trust unit is proof of your property of investment in mutual fund. The unit that you get based on amount of your buying divided by net asset value per unit. For example: if you buy a mutual fund in September 7th amount $ 100, when the net asset value per unit of that day is $ 0.2, then you will get 500 units ($100/0.2). Along the time, the net asset value (NAV) per unit of the mutual fund will increase and decrease along the value or price movement of the stocks or bonds that included in the mutual fund.
The mutual fund can help you to diversify the investment. Diversification is a way to reduce the investment risk with diversify your money in any kind of investment. Do you remember a proverb that said,” Don’t put your egg in one basket!. Why? Because with investing your fund in any investment instruments, if one of the instruments resulted bad performance, it will be covered by performance of another instrument you have. And a way for you doing diversification principles is with investing your funds in some mutual fund
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Five Steps to Retire in Rich

What do you want when you retire in the future? Will you retire rich? What about planning retirement in rich? How can you change your financial condition? It needs hard works and smart efforts, i.e. with saving a few of your monthly income to start accumulating your wealth. Time is the best friend of investment. Therefore don’t wait anymore, just do it now!
The poor man will be poor because they always do their custom, they earn some income and always spend it for today needs that caused them failed to start accumulating their wealth. At least there are five steps that we have to focus on therefore we could gain prosper in the future and retire in rich:

1) Start saving since young
Did you already get a job? If you did, start saving from now. Start saving since you’re still young will give you multiple results along the time. Develop long term saving strategy! You may ask me, how if we did not be young anymore, as if you are 30 years old, how we can accumulate our wealth like them who have started it since they are very young? Every year you delay it, you can’t get these years back with your money growth. There is a proverb said better late than never.

2) Starting from small amount but continues
Getting financial freedom should not with a huge investment. Only with saving a little amount of your monthly income than you invest it, you can gain everything you want. Starting from only 10% from your monthly income and increasing it along your income. The most important thing is you must save it in the front. So, you don’t save it after spending it for your monthly needs. But, when you already receive your monthly salary, save 10% from your income firstly and put it in investment instrument. 10% of your monthly income will not change your lifestyle. But there’s no reason for you to delay starting saving your money to reach your financial freedom in the future.

3) Save and invest regularly
With limited income, you must save your money regularly. The investment pattern of dollar cost averaging is becoming urgently required. Save your money for the future regularly with little amount of investment, it will be a huge fund in the future. Time is the one and only way that can make your little investment become huge wealth. A man, 20 years old, who invest $20 monthly with expected annual return of investment about 14%, he will has $500,000 approximately in next 45 years. Only save less than $1 every day!

4) Invest wisely
If we learn from rich men, they never let their money to quiet and don’t grow it. If they have a little amount, they will put it in saving. When the saving is enough to invest, they will put it in investment instruments which give them better return rate and risk tolerance they can handle it. In their financial life, they never save it in the cash on hand except for their daily needs.

5) Don’t let anything obstruct you to save and invest
Everyone will change in his lifecycle, either good or bad. For them who are rich, the lifecycle does not change their intention to start saving their money regularly. Even in the difficult period, they keep saving and investing for their future goals. Have you ever blame something caused you can’t save money for your future goals? E.g. you already move to another living that needs some money caused you can’t save your money for the future. Getting married and educating child could be another reason not to save your money.
You can mention any reason obstructing you not to save. But remember, everything you do today will affect your future. If you can not save your money regularly from now then gaining financial freedom is only in your dream. But, on the other hand, if you save tour income even in the difficult period then probably you will be able to gain what you’re dreaming. There is financial freedom.

From this explanation, we hope you can get some lesson helping you to gain your future goal as financial freedom. The most important thing in this article is in order to gain financial freedom, you would start saving money from your monthly income regularly even in a little amount an do it consistently as long as your life. Only the time which can help you to gain everything do you want in the future. Just do it from now!
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Compound Interest Basic

Basically, the conventional rate only gives us profit from our investment initial capital. E.g. we put our $ 100 in investment instrument that will give us rate of profit about 6 % annually. With the conventional rate, in the end of first year, we’ll gain profit $ 6. Then, in the second year, we’ll gain profit $ 6 too. The calculation of profit earned from initial capital only.

Meanwhile, the compound interest concept is different. From the $ 100 initial capital you invested, you will get $ 6 in the first year. In the next year, the calculation of investment based on the initial capital added with the profit of the year before ($100+ $6), so the profit in the second year become $ 6.36. In the next year, the profit calculation based on: ($ 106 + $ 6.36) X 6 % = $ 6.7416.
From the mentioned example, we can conclude that compound interest concept gives us much profit. But why many people failed in using the profit from this concept? There is because this concept is a process not a result. Many people don’t understand that to reach final goal, they have to face some process.

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Stock Indexes (2)

S&P 500
The S&P 500 index dates back to 1957 in its modern version (although it has been extrapolated backwards to several decades earlier for performance comparison purposes). This index provides a broad snapshot of the overall US equity market; in fact, over 70% of all U.S. equity is tracked by the S&P 500. The index selects its companies based upon their market size, liquidity, and sector. Most of the companies in the index are solid mid cap or large cap corporations. Like the NASDAQ Composite, the S&P 500 is a market-weighted index, so it provides a fair assessment of the stocks that it tracks. Most experts agree that the S&P 500 is one of the best benchmarks available to judge the market. Its only possible fault is that it does not include foreign stocks (except for a handful that have traditionally been included).

Wilshire 5000
If you’re looking for an index that captures the state of the entire market, you need look no further than the Wilshire 5000. Founded in 1974 by Wilshire Associates, the Wilshire originally listed 5,000 stocks, although in subsequent decades it grew to include considerably more. The Wilshire now tracks over 7,000 stocks (although the name kept the 5,000 number in it for consistency). The index tracks every stock for every company that is headquartered in the United States, leading some to call it the Total Stock Market Index. Like the S&P 500 and the NASDAQ, the Wilshire 5000 index is a market capitalization-weighted index.

Russell 2000
The Russell 2000 index is used to track the performance of 2,000 small-cap stocks. These aren’t necessarily the smallest 2,000 companies in existence; instead the index is composed of the 2,000 smallest companies in another related index, the Russell 3000, which tracks the 3,000 largest companies in the U.S. So in that sense the Russell 2000 can be thought of as the “smallest of the large companies.” Even so, the Russell is a well-diversified index of small-cap stocks that is a useful benchmark for those interested in only small companies.

Foreign Indexes
In addition to all the domestic indices mentioned above, there are a number of indexes used around the world and in the U.S. that track foreign stocks. Morgan Stanley, for example, has a Europe Australasia Far East (EAFE) index that is used to track stocks in developed markets in those parts of the world. England has the FTSE 100 (pronounced “footsie”), a British equivalent for the Dow. And Japan has the Nikkei 225, another index similar to the Dow that dates back to 1949.
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Stock Indexes (1)

Stock indices are benchmarks that are used to gauge the performance of a group of stocks. There are many different types of indices and each of them is unique in its own way. This paper covers the major stock indices that investors use and why they
use them.

Dow Jones Industrial Average
The Dow Jones Industrial average is by far the most famous of all the stock indices. It is composed of 30 widely traded blue chip stocks (large, well-established companies that are leaders in their respective industries). The 30 stocks are chosen by the editors of the Wall Street Journal (which is published by Dow Jones & Company), a practice that dates back to the beginning of the century. The Dow was officially started by Charles Dow in 1896, at which time it consisted of only 11 stocks.

The Dow is computed using a price-weighted indexing system. Simply put, the editors at WSJ add up the prices of all the stocks and then divide by the number of stocks in the index. (In actuality, the divisor is much higher today in order to account for stock splits that have occurred in the past.) The Dow is highly regarded for its simplicity and its history.
However, there are some disadvantages in using the Dow as a benchmark. First of all, the Dow only includes prices for 30 stocks, yet there are thousands of publicly traded stocks on the market. Critics of the Dow therefore question whether or not the Dow is a representative snapshot of the market as a whole. Another problem with the Dow is that it is weighted by price, instead of market capitalization So, for example, a stock that trades at $100 but has a market cap of only $1 billion will receive more weight than a stock that trades at $50 but has a market cap of $5 billion. Most experts agree that market capitalization-weighted indices better reflect the market’s performance than price-weighted indexes.

NASDAQ Composite
Not surprisingly, the NASDAQ Composite tracks all of the stocks listed on the NASDAQ exchange The index dates back to 1971, which is when the NASDAQ exchange was first formalized. The index is used mainly to track technology stocks, and thus it is not a good indicator of the market as a whole. Unlike the Dow, the NASDAQ is market capitalization-weighted, so it takes into account the total market value of the companies it tracks and not just their prices. Since the index tracks all of the 5000+ stocks listed on the NASDAQ, it includes more than just a representative sample of the technology industry. Critics charge, however, that the index tracks too many small companies whose performance increases the index’s volatility.
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The Stock Market (2)

Bull and Bear Markets
In addition to the three market theories mentioned above, there are other ways of thinking about the market as a whole, that are less theoretical and more grounded in what is actually happening to them. One way is to describe the overall trends in the market, such as by defining them as bearish or bullish. A bull market, loosely defined, is a market in which the major stock indexes have risen by over 20% over a substantial period of time, usually measured in months or years. Bull markets can happen as a result of an economic recovery, an economic boom, or simple investor psychology. The longest and most famous of all bull markets is the one that began in the early 1990s in which the U.S. equity markets grew at their fastest pace ever.

Bear markets are the exact opposite of bull markets: they are markets in which the major indexes have declined by 20% or more over a period of at least two months (a decline that large for any shorter time period is simply called a “correction”, especially if it followed a substantial rise). Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly. The most famous bear market in U.S. history was, of course, the Great Depression of the 1930s.

Seasonal and Time-Related Market Factors
During certain times of the year or certain times of the month, the markets tend to exhibit certain behaviors more often than would be predicted by chance. For example, the early fall, October in particular, has historically been a time when the markets have slumped, although the effect isn't extremely pronounced and there isn't a logical explanation for it. Strong stock performance in January is another example of a seasonal market trend. The so-called "January Effect" occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise. But although the January effect has been observed numerous times throughout history, it is difficult for investors to profit from it since the market as a whole expects it to happen and therefore adjusts its prices accordingly.
In addition to the January effect and the October slump, there is also something called the “triple witching hour” that occurs four times per year, during the final hour of trading on the third Friday of March, June, September, and December. This is when the expirations on stock index futures, options on the stock index, and options on stock index futures all expire. When this happens, options and futures begin being bought and sold in vast quantities, which causes large fluctuations in the value of their underlying stocks
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The Stock Market (1)

When people refer to "the stock market" or "the market" it can sometimes be confusing to beginning investors as to what those terms actually mean. Are they talking about all the stocks that trade on the NYSE, all the stocks that trade in the U.S., or all the stocks in the world? Typically when people refer to “the market” they are talking about all the publicly traded stocks in this country (they will usually say “the global market” if they mean the entire world). Indeed, the concept of “the market” can be a difficult one at first, especially since beginners tend to think of stocks as individual units.

Efficient Market
Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors (except, of course, insiders, but insider trading is illegal). Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that you should not be able to “beat the market” since there is no way for you to know something about a stock that isn’t already reflected in the stock’s price. That’s not to say that efficient market theory fans claim that all stocks are necessarily priced correctly; instead, they claim that there is no way for you to know whether or not prices are too high or too low. Proponents of this theory spend little time trying to pick stocks that are going to be “winners”; instead, they simply try to match the market’s performance. However, there is ample evidence to dispute the basic claims of this theory, and most investors don't believe it.

Random WalkThe random walk theory draws conclusions that are similar to the efficient market theory, but it uses a different line of reasoning. The theory takes its name from a well-known book by Burton Malkiel (although others pioneered the idea decades earlier) which says that future stock prices are completely independent of past stock prices. In other words, the path that a stock’s price follows is a “random walk” that cannot be determined from historical price information, especially in the short term. Much like efficient market theory fans, the random walkers believe that it is impossible to pick “winning” stocks and that your best bet is just to try to match the market’s performance, usually by using a long-term buy and hold strategy.

Behavioral Finance
Behavioral finance theory is very different from the random walk and the efficient market theories. Proponents of behavioral finance believe that there are important psychological and behavioral variables involved in investing in the stock market that provide opportunities for smart investors to profit. For example, when a certain stock or sector becomes “hot” and prices increase substantially without a change in the company’s fundamentals, behavioral finance theorists would attribute this to mass psychology (also known as the “follow the herd instinct”). They therefore might short the stock in the long term, knowing that eventually the psychological bubble will burst and they will profit.
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