Investment Choices

Short-Term Choices

Money often needs to be stored relatively short periods of time. There are many reasons : preparing for emergency, anticipating an upcoming expenditure, or waiting for better investment opportunities. There are many vehicles that can hold money during these intervals, each with a range of advantages related to risk, return and liquidity.

- Checking accounts: Because they are designed for ease of withdrawal and deposit, checking accounts pay nearly no interest. They are not recommended for storing any money that will not be used in near-term transactions, but they are extremely convenient for writing and depositing checks, accessing ATMs and arranging for automatic transactions like bill paying. Some checking accounts require fees and minimum balances, so they should be researched before they are opened.
- Saving accounts: Although they provide higher returns than checking accounts, saving accounts still offer very low returns. They are a safe place to store money temporarily and can often be used in tandem with checking accounts to manage basic personal finances.
- Money market accounts : Money market accounts offer many of the same services as checking accounts although transactions maybe somewhat more limited. They are usually managed by banks or brokerages, so they can be a convenient place to store money that is earmarked for upcoming investments or has recently been received from the sale of an investment. Returns remain fairly low with these accounts.

Long-Term Choices

Funds that will not be needed to pay expenses or to make near-term purchases can be invested in securities. A good investment will accrue value over time, but in order to take advantage of the opportunity, you must often allow your money to be outside of your direct control for a significant period of time. Otherwise, short-term volatility may erase the benefits of an otherwise sound investment. Therefore, you should only be buying securities like stocks, bonds and mutual funds with money that you will not need in the foreseeable future.

Different investments will be appropriate for different investors. Your age, amount invested, and reasons for investing will have a significant effect on which types of securities you will choose. Once you understand what the most common investing options are, continue to the section on building a portfolio to learn about putting them to work for your specific financial situation.

Financial Planning

Many people believe that long term financial planning is only important for the wealthy, or that it’s a task best left for professionals, but in reality there are many steps that the average investor can take to solidify his financial future. The first step in the financial planning process is to determine net worth. An investor’s net worth will serve as a jumping off point to begin thinking about his financial future.

Net worth is simply the sum of an investor’s assets minus the sum of his debts. Assets include all of an investor’s assets including real estate, securities, valuables and cash. The value to use in the calculation is the amount that all of those items could be sold for at the present time. Debts include mortgages, car loans and credit card balances, and should be subtracted from the assets to determine net worth.


Once this financial snapshot is detailed, you can address your specific goals. Always remember to think about both assets and liabilities. It is always nice to acquire new assets, but if assets are appreciating more slowly than debt is growing, net worth is decreasing. It is important to strike a balance between building assets and managing debt.

The goal of financial planning, then, is simply to find ways to increase net worth at a steady pace. Saving money, allowing assets to appreciate, and paying down debt will all contribute to this goal. Incoming cash minus expenses will reveal how much money is available to an investor at the end of a given time period. If this value is negative, expenses are outpacing income, and the difference will have to be paid from savings, decreasing net worth. This is obviously dangerous because if the situation doesn’t change, eventually the reserves will run out. If income sufficiently outpaces expenses, it might be time to start contributing to net worth in earnest by acquiring assets and eliminating debt.

Getting started to stock market

As soon as you begin to bring in enough money so that a portion of it may be a set aside for investing, a plan is necessary to take full advantage of that money. The amount of money available to invest also plays an important role in what investments can be purchased. Some investments are subject to limited access because they require certain minimum amounts. More generally, investing a greater amount of money opens the door to a portfolio with more risk and potentially greater returns. However, despite the importance of investing to your overall long-term financial situation, money for health, auto and life insurance and retirement plan contributions should be a higher priority, and should be budgeted for before beginning to invest. Additionally, investing should begin after high-interest debt, especially credit card debt, is paid off. Because after-tax returns will probably not exceed the interest rates paid on credit card debt, paying off the debt first will increase the amount of money you have each month.

After subtracting out essentials and debt, the first division to make within available funds is between savings and funds to invest. Savings allow for access to cash without the fees and lost opportunities associated with removing money from investments ahead of schedule. They should be highly liquid and will usually be located in a savings account, CD or other safe low-yield investment vehicle. Savings should include an emergency fund and funds for major near term purchases. To create a sufficient emergency fund, you should amass enough cash to pay bills for a couple of months in the event of unemployment to cover the costs of major auto repairs or similar unexpected major expenses.

Once those emergency savings are set aside, you can make decisions about where to invest the remainder of your money. These funds differ from emergency savings because they will expected to outpace inflation, taxes, and other drains on finances to serve as a source of income and security over long term. In order to achieve higher returns, your money will be subject to a somewhat higher level of risk than for the emergency funds you put in the safe but low interest investment. One of the most important aspects of investing is determining time horizons. Put simply, it is crucial to know when you will need the money. Common time horizons are based on large future expenses, such as retirement, college, houses or cars. Knowing when money will be needed allows for the most effective investment strategy to be tailored to fit the specific goals that have been outlined.

When funds for investing have been earmarked, it is time to decide how those funds will be augmented in the future. There are a variety of plans to maintain a steady pace of contributions to investments. Of course, the amount invested will have to be adjusted periodically as income and expenses fluctuate, but developing the habit of putting away some amount of money each month is an important part of building a successful portfolio.

What is Investing?

The idea behind investing is that money is put to use in such a way that it is likely to turn into more money. This could happen because someone is willing to pay interest to use the money or because the value of whatever security the money was used to buy increases during the period of ownership. Destinations for invested money include savings accounts, stocks, bonds, mutual funds and numerous other investment options.

It is important to note that because money can be invested, the value of a given amount of money changes over time. The longer that a given amount of money is under your control, the longer you have to invest it and make more money from it. For this reason, it is almost always preferable to have money sooner than later. The name given to this concept is the “time value of money”; that is, the idea that a dollar now is worth more than a dollar in the future, because a dollar now can accrue value through interest or other appreciation until the time at which the dollar in the future would be received.

At the same time, there is a penalty associated with not investing the money that you already have. Because prices tend to rise over time, the value of money gradually decreases. This effect is called inflation. Money that is not invested or that is accruing value at a slower rate than the rate of inflation is becoming worth less and less as time passes. Therefore, investing is not only an opportunity to make more money, but it is the only way to protect the money that you already have.

Another spectacular benefit associated with many investments is compounding. Money that is earning interest grows at a constant rate, paying the same amount of interest at the end of each time period. However, if that interest is added to the principal that began earning money originally, there is more money earning interest. In this way, interest causes money to increase in value exponentially over time. As more and more money earns interest, more and more interest is earned. This scenario is constantly playing out in bank accounts, CDs, and any other investment that offers compound interest. The more frequently the interest compounds, the bigger the payoff because, on average, more money is earning interest at any given time.

It is important to distinguish between investing and gambling. Earning interest and taking advantage of compounding may not produce the immediate jackpot that comes with winning the lottery, but the risk of ending up with nothing is often far worse than waiting for a safe investment to pay off. Pouring a great deal of money into one stock is very similar to gambling. It could pay off, but if it doesn’t the potential losses are great. Safe and diverse investments may slow the pace of returns, but they also prevent the bottom from falling out and leaving you with nothing.

Online Stock Market Trading

How to avoid the dangers of online stock market trading

Online stock market trading has made it possible for millions of individuals, especially those who are not keen on investing in stocks the traditional way, to play the stock market game. Almost anyone, from novice investors to expert day traders, can participate in online stock market trading.

But online stock market trading has many dangers and if you are nit careful you could end up losing instead of earning lost of money.

Online stock markets trading allow individuals to participate in the stock markets at greater speed. But because of this, it has also become easier to make investment mistakes. Therefore, the fundamentals of smart should still be applied in online stock market trading to avoid falling into traps.

One of the most common problems with first-timers in online stock market trading is they think they can make a lot of money online even without any investment skills and knowledge. This is probably brought about by stories of overnight successes. They must keep in mind that for every ten investors that makes lots of money from online stock market trading there are at least ten who lose money.

New online stock market traders think that they could survive in online stock market trading without any investment skills and knowledge is because markets have been bullish recently. For the past six or seven years, common investors made significant profits from any buy and hold strategy. Investors only start to realize the importance of being financially savvy when markets show bearish signals. That’s the only time they employ smart financial planning through diversification.

What potential online stock market investors need to realize is that online stock market trading is really no different from traditional stock market treading. The web hasn't changed the fundamentals of smart investing it has only made it easier to invest. Individuals – like most professional day traders - should still have a set of rules and guidelines to help them avoid the dangers of online stock market trading.

Like in traditional stock market trading, the first thing you have to do is to arm yourself with basic information about the company you’re investing into so as to avoid “gambling.”

Perform some fundamental analysis to determine if the stock is worth the price. You can do this by researching. Good source are websites of major brokerage houses, finance publications and mutual-fund companies.

Because online stock market trading is easier, it becomes tempting to trade often. But it's tough to beat the market on a consistent basis. For the long term, a buy-and-hold strategy is the best way to invest even in online stock markets.