Basics Of The Stock Market

Many new investors jump into the stock market based on hearing the hype of how it?s possible to make great money investing this way. They may have heard of a friend who made a bundle with day trading or a colleague who has a hot stock tip and so they figure they?ll jump into the market too.

Before you begin investing, it?s important that you understand at least the basics of the stock market.

While investing in stocks can help you to build a great investment portfolio, if you?re not careful about your strategies, you could also find it can be a great way to lose a lot of money too.

There are two sections to the stock market. The primary market is where shares are created by companies and generally offered to the public via an IPO (Initial Public Offering). The secondary market is where established stocks are exchanged and traded among investors without the involvement of the company issuing the stocks.

When people think about investing on the stock market, they tend to be talking about the secondary market.

Basics of Stock Market Shares

Shares, or stocks, are individual pieces of ownership of much larger companies. When companies need to raise capital, then sell off little portions of the company so that investors may become partial owners of that company. Each time you buy a stock, it represents a share of ownership in a publicly listed company. You become a shareholder. As you increase the number of stocks you have in one particular company, you increase the percentage of ownership you have.

As a shareholder, you are entitled to your share of the company?s earnings. These are usually paid as dividends, although not all companies offer dividend payments. You?re also entitled to exercise any of the voting rights that might be attached to that stock, however you don?t have a say in the daily operational running of that business.

Basics of Stock Market Pricing

There are several factors that can affect the price of stocks and you might notice that the price of stocks changes every day. While the price can be partially dictated by supply and demand, there are also other factors that can affect the overall price too. Economic changes, unemployment or bad management in the company are all individual factors that can also affect the pricing.

 

The price you see listed on any particular stock is based on the perceived profitability of the company and not the value of the company. This means the stock can often be priced based on what investors believe the stocks are worth. The value of the company is called the market capitalization.

When you see on the news that the market rose or fell by a number of points, it?s important to understand that not every single stock listed on the exchange followed the same movements. The index you see reported is a representation of a number of stocks and presented as a single figure to give a general idea of the market movements as a whole.

However, there will always be individual companies that move contrarily to the main market sentiment. It?s this contrary movement that day traders watch for, trying to find the next stock pick that will rise in value and gain profits for them.

Basics of Stock Market Investing

There are several types of stock market investment strategies. Day trading is growing in popularity as a way to smaller investors to begin building capital. The basis behind day trading is to buy a stock in the early part of the trading day and hopefully sell it again at a profit before trading closes.

Long term investors tend to purchase many different stocks in a diversified range of companies in various sectors to spread their risk. These investors tend to hold stocks for longer periods of time, allowing the value of their stocks to appreciate. They also receive dividend payments, either in the form of a check or as a dividend reinvestment plan, where the company issues stocks to the value of the dividend payments to the shareholder to add to his portfolio.

This is how retirees live on $1 million

For most people, the word “millionaire,” a term coined in the 18th century, calls to mind images of lavish wealth and extravagant lifestyles. Simply having this much money once represented a ticket to life on easy street. These days, thanks to inflation, cost-of-living increases and lifestyle changes, retiring on $1 million isn’t as carefree. It now requires smart budgeting to ensure this nest egg lasts for a retiree’s remaining years.

Though it does not provide for the sumptuous lifestyle of years past, having $1 million for Social Security benefits to pay the bills each month (see What is the size of the average retirement nest egg?). This is a big reason why the poverty rate for Americans 65 and over is frighteningly high. A retiree with exactly $1 million may not be spending much time at The Breakers in Palm Beach, or the Plaza Hotel in New York. But invested smartly, this sum should ensure he or she can live in a typical U.S. big city – such as Chicago, Los Angeles or Houston – without worrying about poverty or inability to pay the bills.

Let’s take a closer look at two of the key strategies shrewd retirees employ to stretch $1 million throughout the retirement years. One technique is to purchase an bond investments, then withdraw a fixed percentage of that portfolio each year to pay living expenses.

Immediate Annuities

The Good

For retirees who worry about running out of money at some point, an immediate annuity offers perhaps the single most attractive feature of any retirement product: a fixed-income stream that is guaranteed for life – whether the purchaser dies the day after buying the annuity or lives to 120.

Immediate annuities are sold by life expectancy. The longer he or she is expected to live, the lower the monthly payments. For this reason, women, who generally outlive men, receive smaller annuity checks on the same balance.

While life expectancy is used to calculate benefit amounts, the checks do not stop coming once that age is reached and the annuity balance is amortized. Rather, the retiree receives checks for as long as he or she lives. “Purchasing an immediate annuity is like buying a pension. You exchange a lump sum for the insurance company promising to pay you for the rest of your life,” says Georgia Bruggeman, CFP®, Meridian Financial Advisors, LLC, Holliston, Mass.

An annuity is essentially insurance against outliving one’s money, with the insurance company assuming the risk of the individual living too long. A retiree who prioritizes peace of mind in this regard, knowing that his parents and grandparents all lived to 100, should consider an annuity.

The Bad

Annuities feature two distinct disadvantages: tax treatment and illiquidity. While most investment income earned over a long period is taxed at long-term capital gains rates, annuities are taxed at ordinary income rates. The difference between the two depends on the investor’s tax bracket; it might be immaterial, but it might also be significant. For a high-income earner, the top ordinary tax rate, as of 2016, is 39.6%. Long-term capital gains, by contrast, are never taxed at more than 20%.

The other problem with annuities is that owners are effectively limited to their monthly checks. “Buying an immediate annuity when interest rates are still relatively low is not a good idea, especially with the high upfront fees and surrender costs associated with annuities, because the fixed payments will be low and won’t increase even if interest rates go up,” says Elizabeth Saghi, CFP®, president, InAlliance Financial Planning, in Santa Barbara, Calif. What’s more, you cannot withdraw a large chunk from the annuity, such as for an emergency or a major purchase, without incurring penalties.

It comes down to priorities. If having income for life is a bigger priority to a retiree than having access to his or her money in full, an annuity might be the best option. Otherwise, retirees should look elsewhere – or at least not invest all or most of their retirement funds in an annuity. “Any unexpected cash need (health need or otherwise) as well as the potential for future inflation make these products less desirable,” says Evan L. Wolk, managing director, Wolk Financial Management, Inc., Parkland, Fla.

Traditional Portfolio

The Good

Another strategy to make $1 million last through retirement is to place the money in a diversified portfolio and withdraw a set percentage per year, indexing that amount to inflation. Many retirees who use this strategy follow the 4% rule. They withdraw 4% the first year, or $40,000, and they live on this amount. The second year, they take out the same 4% plus the rate of inflation for that year. If inflation were 2%, the second year’s withdrawal would be 102% of $40,000, or $40,800. The third year follows the same pattern, and so forth, with the retiree always taking out 4% plus the accumulated inflation rate. Projecting forward the interest rates and inflation environment of 2016, a retiree can easily make $1 million last more than 30 years using this strategy.

“A globally diversified portfolio allows investors to match their individual risk capacity with their individual risk exposure, provide flexibility in terms of access to their money, potentially provide flexibility in terms of tax exposure and provide potentially higher payout rates than what is provided by products in the insurance market. While a 4% withdrawal rule is a good start, I usually tell clients they can afford 5% to 6% if they are globally diversified with tilts towards the known sources of expected return, such as small cap and value stocks,” says Mark Hebner, the president and founder of Index Fund Advisors, in Irvine, Calif., and the author of “Index Funds: The 12-Step Recovery Program for Active Investors.”

The Bad

The main downside to the traditional portfolio strategy is, unfortunately, no method exists to project with certainty future market returns or inflation rates. The years following the bear market or a period of unusually high inflation – the 1970s featured both – causes a retiree’s $1 million to evaporate much more quickly if it is invested using the strategy outlined above.

The Bottom Line

Investing $1 million in a traditional portfolio and taking yearly withdrawals gives a retiree more flexibility with money than purchasing an annuity does. The returns from mutual funds, historically, have been stronger than annuity returns. And in a low interest rate environment, such as the current one, annuities are going to have less generous payout rates than in times when interest rates are higher.  On the other hand, an annuity offers a retiree one feature a traditional portfolio does not –  an iron-clad guarantee he or she will never outlive his or her money.

10 Ways to Save $200 a Month

5 car insurance myths that are costing you

Car crashes are getting more serious with an increase in fatalities in the past few years. Data from the National Safety Council indicates a 6% increase in motor-vehicle deaths in 2016, and $432 billion to cover the costs of motor-vehicle deaths, injuries, and property damage — 12% more than the previous year.

With that sobering stat in mind, it’s important to get the right car insurance coverage and to steer clear of common misconceptions about what can impact your rates. So here’s a course on what’s fact vs fiction.

#1 Fact or Fiction: Red cars cost more to insure

You’ve probably heard the rumor that a red car costs more to insure than other colors. It’s a popular myth, but your car’s color is not a factor in determining your insurance premium. In fact, your insurer most likely doesn’t even know the color of the car you’re driving.

What does drive up the price of your premium is your driving record, as well as your car’s make, model, engine, body type and safety features. So you can expect to pay more for a high-performance red sports car than a red sedan.

#2 Fact or Fiction: Your age affects your car insurance rate

If you’re going through a midlife crisis and need to roll up in that Maserati, the good news is you might get to pay less because of your age. Insurance premiums decrease once you’re 55 with a good driving record.

“Premiums go down as more mature drivers have more experience behind the wheel, resulting in the number of crashes decreasing,” says Loretta Worters of the Insurance Information Institute.

On the other hand, the highest-paying age groups are those age 16 to 20 year, then 21 to 24. And rates continue to drop until you’re 70.

#3 Fact or Fiction: Your car’s age affects your premium

With new vs. used, it depends on the type of car you’re looking to insure. A new car could cost less to insure because of its advanced safety features. But a pre-owned vehicle with a lower MSRP could be less expensive to insure because it costs less to repair. That said, if either of those cars are on the list of cars that thieves love to steal, then your premiums could still be higher. Some of the most popular cars among car thieves include Honda Accords and Civics, pickup trucks from Ford and Chevrolet, and Toyota Camrys.

#4 Fact or Fiction: Men are better drivers and pay less for car insurance

Women have long been picked on for being worse drivers than men. But the facts say otherwise. It turns out women are generally safer, less aggressive drivers than men. So while women have more minor fender benders, men have more serious accidents and get more speeding tickets — which means women pay less for car insurance.

Down the line, that could change, says Worters. “For now if you’re a woman, you’re still in luck. But there are more women drivers on the road than there were 20 or 30 years ago and these younger drivers are exhibiting behaviors conducive to accidents like texting and driving. So it’s starting to change,” says Worters.

#5 Fact or Fiction: The smaller the car, the smaller your insurance bill

Compact vehicles are riskier because they can be made with lower-quality materials and likely to take on more extensive damage in a collision. And just by sheer force and weight, smaller cars can be more heavily damaged when impacted with a larger car.

Considering a compact car that’s a top safety pick can be one way to save. Volkswagen Jettas, Toyota Corollas, Mazda3s, and Honda Civics are among some of the top picks for safety from the National Highway Traffic and Safety Administration.

Other ways to save on car insurance? Shop around for at least three quotes, the average cost of insurance in US is $866 a year, according to the National Association of Insurance Commissioners. Build up your credit score, and don’t be so fast and furious on the road.

The Savings Rate Method of Retirement Planning

When it comes to saving for retirement, one of the toughest parts is determining how much to save. Plenty of online calculators allow savers to set goals, and professional financial planners have their own methods for determining target numbers for clients. These options for calculating your retirement number are helpful. But there’s one hitch: They often depend on your best guesses about events that are far in the future.

[See: How to Save $1 Million by Retirement.]

Many aspects of retirement planning require an educated guess. For instance:

— How much will you spend each year of retirement?

— How many years do you expect to live?

— At what age do you plan to retire?

— Will you pay off your home during retirement?

— Will you live in your current location or somewhere cheaper or more expensive?

— How will the market perform, on average, over the next two decades?

Some of these questions are impossible to answer, and your responses might also change over time. But you don’t need to know the answers to all of these questions to build a nest egg for the future.

[Read: How to Get a Good 401(k) Match.]

Select a savings rate. Instead of focusing on a far-away goal of saving $1 million or more by your desired retirement age, you can set monthly or annual savings goals. It’s possible to cut through the complications of your retirement goals by focusing on your current savings rate. Here’s how this savings strategy works:

1. Make concrete savings goals. It’s no secret that Americans have trouble saving for retirement. Some of the problem is likely that retirement seems so far away. Sure, you want to save a million dollars, but it’s easy to delay saving when you have 30 or 40 years until retirement. Focusing on saving a set percentage of your income each year forces you to think in immediate terms.

2. Lower the bar. One way to calculate future retirement needs is by estimating your retirement expenses and multiplying your annual expenses by the number of years you expect to be retired. But it’s tough to estimate your expenses 30 years into the future. Setting a savings rate goal of at least 10 percent of your salary — but preferably 20 percent or more — teaches you to live on less money right now, and you can continue that frugal lifestyle in retirement.

3. Save more quickly. If you look at a retirement calculator with standard inputs, such as average rate of return and annual income, you might find that you can get away with saving less than 10 percent per year. By setting the bar high with a savings rate goal, you’ll save a large balance more quickly, so you’ll reach your savings goal much sooner.

[Read: How Long Does it Take to Vest in a 401(k) Plan?]

Don’t only use this method. The savings rate method is an excellent option for young savers. The younger you are, the more difficult it is to determine what your financial needs will be in retirement. So instead of estimating retirement expenses that could change, focus on saving at least 10 percent of your income, preferably more.

As you get closer to retirement, then you may want to use more complex methods to set your retirement savings target. You may find that you want to increase your savings rate to allow for a more luxurious retirement. Or maybe you’ll find you’re on track to retire sooner than you planned.

The savings rate method is a great way to begin to save for retirement. Then as you move closer to retirement, you can use more complicated methods to refine your retirement savings needs.

Here’s why women need to take control of their money right now

Military Millennials: What the Research Reveals

Millennialsthose born between about 1978 and 1994came of age in an America that is different than it was for previous generations. They grew up in a country characterized by more racial diversity, a narrower gender gap in educational attainment, large increases in the cost of higher education and the defining events of September 11, 2001. They faced the economic challenges of the Great Recession early in their lives and/or careers. They are also the first “digitally native” generation, and the most educated generation in American history.

 

Millennials are the largest cohort in the U.S. workplace today. While millennials make up about 30 percent of the general population in the U.S., they constitute nearly three quarters of the service men and women in the military. Understanding the financial capability of millennials in the military is an important step toward understanding the financial capability of the military in general.

Toward this end, the FINRA Foundation performed an analysis of the financial capability of millennials in the military using data from the 2012 National Financial Capability Study. The research revealed that military millennials are much more likely to be married than their non-military peers. Thirty-five percent of active duty millennials surveyed have student loan debt, and about a third have mortgages. Fifty-two percent of survey respondents are concerned that they have too much debt.

Three in four military millennial respondents indicated they were offered financial education, and of those, almost half participated in financial education—a financial education rate that is much higher than the national average. In addition, forty-one percent of the military millennial respondents have high levels of financial literacy, again, a rate significantly higher than the national average, which is 24 percent.

Not surprisingly, married military millennials with dependents reported more financial stress than those without. Of the sample, twenty-one percent of active duty married millennials have unpaid medical bills, and over 40 percent engaged in costly credit card behaviors, such as carrying a balance and paying late and over-the-limit fees, over a 12-month period.  Twice as many married millennials with dependents reported using costly, alternative forms of borrowing like pawn shops and payday lenders than married millennials without children.

As Ms. Rosemary Williams, DASD for Military Community & Family Policy, briefed at the July 2014 Financial Roundtable meeting, military millennials are also more likely than other millennials to live away from urban areas and, not surprisingly, own cars and carry auto loans.

Millennials also communicate differently. Especially in the United States, they are the first generation that did not have to adapt to the Internet and mobile technologies—instead, they were born with them.

The financial outlook is not all gloomy for Millennials though. Millennial respondents are nine percent more satisfied with their financial situation than the generation Xers that preceded them. That may be about managing their financial expectations.

Can we draw general conclusions about military millennials from this research? Here are some thoughts:

  • Military millennials lived through more than a decade of war and deployments—and few have experienced peacetime in their careers.
  • They experienced some traumatic events in their formative years: 9/11, the housing bubble and stock market collapse.
  • They carry student loan and medical debt burdens that previous generations did not often have to bear.

Different experiences can lead to different behaviors. Millennials behave differently. Those organizations best positioned to meet their needs will understand the different challenges and opportunities Millennials face and adjust to new ways of working with them.

This student debt strategy can save you more than $18,600

More than 8.5 million Americans are enrolled in income-based repayment plans that can spread out payments for their federal student loans for two decades or more.

While the repayment plans lower the monthly payments of borrowers, these plans do not reduce the interest rates on student loans and can increase the total amount of interest borrowers pay over time.

Borrowers with good income and credit are using another strategy: student loan refinancing. This means taking out a loan with a private lender, usually at a lower rate, to pay off the debt on the federal loan. Borrowers save more than $18,600 by reducing the rates on their student loans by an average of 1.7 percentage points through refinancing, according to Credible.com, a marketplace of online lenders.

The savings from student loan refinancing do come with some drawbacks.

Borrowers who refinance with private lenders can’t take advantage of income-based repayment plans and public service loan forgiveness provided by federal loans. Though some private lenders offer forbearance if borrowers can’t make their payments, the benefits aren’t as robust as those with federal loans.

“Student loan refinancing is giving up an insurance policy from the federal government. If you don’t need it and are comfortable with the risk, you can save thousands,” said Nick Clements, co-founder of price comparison website MagnifyMoney.com, which tracks private lenders that provide student loan refinancing.

More from College Game Plan:
Trump’s budget seeks to eliminate one major benefit of federal student loans that costs billions
Three ways to avoid the financial death spiral of defaulting on your student loans
The 3-minute tool to calculate your actual college costs

High-income borrowers with six-figure loan balances are being aggressive about paying off their student debt. Fifty-four percent of borrowers who refinanced more than $100,000 in student loan debt had loans with repayment terms of 10 years or less, according to Credible. (The standard repayment term for federal student loans is 10 years.)

Law, pharmacy and medicine were the most common graduate degrees held by high-balance borrowers refinancing loans, according to Credible. These borrowers earned $126,192, on average, and refinanced loan balances averaging $150,511.

You will need an excellent credit score to get the best deals with student loan refinancing. Eighty-four percent of high-balance borrowers who used Credible had credit scores of 740 or above when they refinanced. (Credit scores range from 300 to 850 and the average FICO score is 699.)

“It’s not just for the HENRYs [high earners, not rich yet], you can refinance your student loans with a credit score as low as 620 if they have a co-signer ,” said Stephen Dash, founder and CEO of Credible.

What you need to refinance

It pays to shop around for the lowest rate with student loan refinancing.

Fair Isaac Corp., which calculates and sells FICO scores, said rate shopping for student loan lenders will not affect your credit score as long as you do it within a 30-day period.

Here’s what to know when you’re looking to refinance your student loans:

  • Geography and cash flow matter. Someone who is making $60,000 a year in Omaha, Nebraska, would likely be viewed more favorably by lenders than someone making $60,000 in San Francisco. Lenders also will evaluate borrowers’ living expenses, not just income. So the better you budget, the better rate you may receive.
  • If you missed any payment in the past, you probably won’t qualify without a co-signer. Borrowers who recently graduated may not have the best credit scores yet. However, it’s more important to show lenders that you pay your bills on time.
  • Know the trade-offs between fixed- and variable-rate loans. Currently, lenders are offering fixed-rate loans starting at 3.38 percent and variable-rate loans as low as 2.58 percent. The rate on a variable-rate loan will rise and fall based on a market benchmark, in most cases, the London Interbank Offered Rate .
  • Avoid origination fees. Most lenders don’t charge origination fees for student loan refinancing. If you find one that does, move on.
  • Sign up for automatic payments. Many lenders offer a 0.25 percent interest rate discount if borrowers automatically deduct student loans from their bank accounts.

The Savings Rate Method of Retirement Planning

When it comes to saving for retirement, one of the toughest parts is determining how much to save. Plenty of online calculators allow savers to set goals, and professional financial planners have their own methods for determining target numbers for clients. These options for calculating your retirement number are helpful. But there’s one hitch: They often depend on your best guesses about events that are far in the future.

[See: How to Save $1 Million by Retirement.]

Many aspects of retirement planning require an educated guess. For instance:

— How much will you spend each year of retirement?

— How many years do you expect to live?

— At what age do you plan to retire?

— Will you pay off your home during retirement?

— Will you live in your current location or somewhere cheaper or more expensive?

— How will the market perform, on average, over the next two decades?

Some of these questions are impossible to answer, and your responses might also change over time. But you don’t need to know the answers to all of these questions to build a nest egg for the future.

[Read: How to Get a Good 401(k) Match.]

Select a savings rate. Instead of focusing on a far-away goal of saving $1 million or more by your desired retirement age, you can set monthly or annual savings goals. It’s possible to cut through the complications of your retirement goals by focusing on your current savings rate. Here’s how this savings strategy works:

1. Make concrete savings goals. It’s no secret that Americans have trouble saving for retirement. Some of the problem is likely that retirement seems so far away. Sure, you want to save a million dollars, but it’s easy to delay saving when you have 30 or 40 years until retirement. Focusing on saving a set percentage of your income each year forces you to think in immediate terms.

2. Lower the bar. One way to calculate future retirement needs is by estimating your retirement expenses and multiplying your annual expenses by the number of years you expect to be retired. But it’s tough to estimate your expenses 30 years into the future. Setting a savings rate goal of at least 10 percent of your salary — but preferably 20 percent or more — teaches you to live on less money right now, and you can continue that frugal lifestyle in retirement.

3. Save more quickly. If you look at a retirement calculator with standard inputs, such as average rate of return and annual income, you might find that you can get away with saving less than 10 percent per year. By setting the bar high with a savings rate goal, you’ll save a large balance more quickly, so you’ll reach your savings goal much sooner.

[Read: How Long Does it Take to Vest in a 401(k) Plan?]

Don’t only use this method. The savings rate method is an excellent option for young savers. The younger you are, the more difficult it is to determine what your financial needs will be in retirement. So instead of estimating retirement expenses that could change, focus on saving at least 10 percent of your income, preferably more.

As you get closer to retirement, then you may want to use more complex methods to set your retirement savings target. You may find that you want to increase your savings rate to allow for a more luxurious retirement. Or maybe you’ll find you’re on track to retire sooner than you planned.

The savings rate method is a great way to begin to save for retirement. Then as you move closer to retirement, you can use more complicated methods to refine your retirement savings needs.

How are you taxed after selling a mutual fund in a Roth IRA?

A:Once money is invested into an individual retirement account (IRA) or a Roth IRA, there are no tax consequences for trading securities within the account as long as the money remains in the same account. With Roth IRAs specifically, contributions are taxed at the holder’s current ordinary income rate before the deposit is made. Once the money is invested in the account, capital gains and income are not taxed. Distributions from Roth IRAs are not taxed once they are withdrawn from the account, either. Those investing in various mutual funds, stocks and other securities often wonder about the tax consequences of trading within their accounts, as they may want to switch investments but fear owing money.

Suppose a mutual fund in a Roth IRA account has grown to $100,000 and is sold. Due to the sale event, the mutual fund realizes a long-term capital gain of $20,000. No tax liability is generated, and the full $100,000 can be invested in another security or left in cash. This holds true for traditional IRAs as well, though distributions from these accounts are taxed at the holder’s ordinary income tax rate. If this example sale occurred in an individual brokerage account, the $20,000 long-term capital gain would be subject to the investor’s long-term capital gains tax rate. If that rate were 15%, then a tax liability of $3,000 would be due and the investor would have the remaining $97,000 to invest in other securities.

A:Once money is invested into an individual retirement account (IRA) or a Roth IRA, there are no tax consequences for trading securities within the account as long as the money remains in the same account. With Roth IRAs specifically, contributions are taxed at the holder’s current ordinary income rate before the deposit is made. Once the money is invested in the account, capital gains and income are not taxed. Distributions from Roth IRAs are not taxed once they are withdrawn from the account, either. Those investing in various mutual funds, stocks and other securities often wonder about the tax consequences of trading within their accounts, as they may want to switch investments but fear owing money.

Suppose a mutual fund in a Roth IRA account has grown to $100,000 and is sold. Due to the sale event, the mutual fund realizes a long-term capital gain of $20,000. No tax liability is generated, and the full $100,000 can be invested in another security or left in cash. This holds true for traditional IRAs as well, though distributions from these accounts are taxed at the holder’s ordinary income tax rate. If this example sale occurred in an individual brokerage account, the $20,000 long-term capital gain would be subject to the investor’s long-term capital gains tax rate. If that rate were 15%, then a tax liability of $3,000 would be due and the investor would have the remaining $97,000 to invest in other securities.