906223151:-2106298633:1|%%|Introductory Page to Investment Earnings|%%|Investment Earnings|%%| INVESTMENT EARNINGS Investment earnings may come in a variety of forms Some earnings are immediate while you may need to wait for others In this tutorial you will learn about the various kinds of investments and how they earn money Dividends capital gains and interest income will be covered in the sections related to these kinds of investments Lets begin by looking at the ways that earnings are distributed to stock investors 
906223151:-2106298633:5|%%|Earnings Are Interest, Dividends, and Capital Gains|%%|Investment Earnings|%%| EARNINGS ARE INTEREST DIVIDENDS AND CAPITAL GAINS Our discussion of the different kinds of investment should help you identify the different ways in which income is paid out to investors You should also be aware of the differences between income generated from stock investments and income generated from bond investments Finally you should have an understanding of how investment earnings are taxed and what implications that has for the investor Earnings exist as interest dividends and capital gains Different investors will have their own preferences for how they want to receive their income They should target those investments that have the earnings characteristics that they desire For more information about investing in stocks and bonds check out other tutorials in the Stocks and Bonds categories 
906223151:-2106298633:3|%%|Earnings on Bond Investments|%%|Investment Earnings|%%| EARNINGS ON BOND INVESTMENTS Bond earnings are different from stock earnings though they both have potential capital gains Where stocks earnings are highly variable bonds generally provide a fixed return in the form of coupon payments The coupon rate is the rate of interest that the individual bond pays to its owner A bonds price on the secondary market will fluctuate depending on the market interest rate When a bonds coupon rate is equal to the market interest rate the bond will sell at its stated or par value Par value is the amount stated on the bond but not necessarily the purchase price of the bond When interest rates go up the bond will drop in value and sell at a discount from par value Just the opposite occurs when rates go down and the bond then sells for a premium over par value Lets take for example a 30year bond with a 7 percent annual coupon rate and a 1000 par value Every year the bondholder will receive a coupon payment of 70 Although the 7 percent coupon rate will not change for the duration of the 30 years the market interest rate will change If the market interest rate rises above 7 percent the market price of the bond will fall If the market interest rate falls below 7 percent the price of the bond will rise The combination of coupon payments and capital gains is your total earnings on bond investments Suppose you purchase our 30year bond for its par value of 1000 At the end of the year you collect the 70 coupon payment and sell the bond for 1030 Your return for the year would be 10 percent Zero coupon bonds do not make coupon payments Instead they are sold at a discount and redeemed at par value the bondholder receives accrued interest gains when the bonds are redeemed Any amount you receive by selling the bonds over the purchase price and accrued interest may be treated as capital gains Of course the government will want a piece of your investment earnings What are the implications of the tax code for your investments?
906223151:-2106298633:4|%%|Tax Implications of Investment Earnings|%%|Investment Earnings|%%| TAX IMPLICATIONS OF INVESTMENT EARNINGS Now that you know how investment earnings are paid out it is important to know how your earnings will be taxed In 2003 through 2008 dividends are taxed at 15 percent for taxpayers in the 25 percent and higher brackets For those in the 10 and 15 percent brackets dividends are taxed at 5 percent in 2003 through 2007 then at zero percent in 2008 In 2009 the lower rates sunset or expire and the tax on dividends will revert to the prior ordinary income tax rates The interest from most municipal bonds is exempt from federal and sometimes state income taxation Capital gains on investments that are held for more than a year longterm capital gains are usually taxed at a lower rate than other forms of income In 2003 through 2008 capital gains are taxed at 15 percent for taxpayers in the 25 percent and higher brackets For those in the 10 and 15 percent brackets capital gains are taxed at 5 percent in 2003 through 2007 then at zero percent in 2008 Be aware however that this tax benefit only applies to capital gains transactions after May 5 2003 In 2009 the lower rates sunset or expire and the tax on capital gains will revert to their current 10 percent and 20 percent rates Another important tax implication is centered on capital lossesthe opposite of capital gains If you lose money on your investments you are able to deduct up to 3000 of your losses from your taxable annual income Losses over 3000 may be carried over to future years This explains why so many people sell their stocks in December Investors often choose to unload securities that are losing money in December in order to take advantage of this deduction on their income taxes Now that you understand how investment earnings are taxed lets summarize this tutorial 
906223151:-2106298633:2|%%|Earnings on Stock Investments|%%|Investment Earnings|%%| EARNINGS ON STOCK INVESTMENTS Stocks provide two different kinds of income dividends and capital gains Capital gains are earnings generated by the sale of stock that has increased in value above its purchase price Dividends are portions of company profits paid out regularly to investors In general companies that are mature with low growth will provide bigger dividends than companies that are rapidly growing Growth companies will plow their earnings into new business opportunities rather than distribute their earnings to shareholders Investors who have a larger tolerance for risk and can wait longer to receive their income may opt for highgrowth firms that do not pay out dividends but whose stock price has tremendous upside potential Some investors who prefer income sooner rather than later will opt for wellestablished lowgrowth companies that pay out large annual dividends A stocks total return is composed of dividends and capital gains Lets take a look at a simple example Suppose you bought a stock at the beginning of the year for 100 One year later the company paid you a dividend of 2 and you sold the stock for 105 Your total return would be 7 percent Suppose you bought an Internet stock for 100 that pays no dividend while you hold the stock but you sell it one year later for 110 Your total return would be 10 percent With stocks dividends and capital gains work together to provide you with your total return What about earnings on bond investments? Lets look at how bonds provide income to investors 
1:-2081443166:2|%%|What Are Zero Coupons?|%%|Zero Coupon Securities|%%| WHAT ARE ZERO COUPONS? Like bonds zero coupon securities are debt instruments issued by the US Treasury municipal governments corporations or brokerage firms With traditional bonds the coupon rate is the rate of annual interest the issuer pays to the bondholder The zero in zero coupon then means that this kind of security does not make any interest payments as bonds do Why would anyone go for that deal? Because zero coupons are issued at discounts usually far below the face value or par of the security As with bonds the issuer pays the holder the par value when the instrument reaches its maturity date So while your zero coupon will not make regular interest payments while you hold it it will pay out much more than you paid for it when it matures While this growing value appears to be similar to the capital appreciation of an investment in stocks it is essentially compounding interest income not a capital gain There is a growing variety of zero coupon instruments or zeros for short Lets look at the basic types next 
1:-2081443166:1|%%|Introductory Page to Zero Coupon Securities|%%|Zero Coupon Securities|%%| ZERO COUPON SECURITIES Zero coupons offer to make you a deal give up the interest payments you would get from owning other kinds of debt instruments and get a hefty guaranteed lump sum at the end as long as the issuer does not default This tutorial will introduce you to the basics of zero coupon securities So what is a zero coupon anyway? 
1:-2081443166:3|%%|Basic Types of Zero Coupon Securities|%%|Zero Coupon Securities|%%| BASIC TYPES OF ZERO COUPON SECURITIES There are as many kinds of zero coupons as there are bonds plus a number of interesting variations Corporate zeros Like corporate bonds done zerostyle Because you are buying into the credit risk of the corporation corporate zeros are the most risky kind of zero coupon These are even riskier than a corporate coupon bond or registered bond because if the issuing company defaults on the zero the holder receives no interest at all Strips and STRIPS Strips are zeros that are backed by government securities and offered by brokerage houses Brokerages are proliferating their own proprietary brands of strips under a dizzying array of acronyms TIGRs CATS and other species Each has different features but works in a similar way The brokerage buys either US Government or municipal securities and holds them in escrow It then separates—strips—the principal from the interest and markets zero certificates based on one or the other One example is the Salomon Brothers CATS Certificate of Accrual on Treasury Securities a zero in which the face value is based on the accrued value of the underlying Treasury securities The Treasury also offers STRIPS—separate trading of registered interest and principal of securities—based on Treasury bonds And some of the venerable US savings bonds are actually forms of zeros as well Municipal and state governments also issue zeros in the form of zero coupon municipal bonds which frequently have lower returns but are generally taxfree on the federal level Finally zero coupon convertibles can be changed from zeros to other kinds of securities Companies may issue zero coupon bonds that may be converted into shares of common stock in the company Convertible municipal zeros can change from zero coupon to regular interestpaying bonds at some time before maturity What factors should you consider before you buy zero coupons? We will examine that question next 
1:-2081443166:5|%%|"Zeros" Are a Unique Twist on Bonds|%%|Zero Coupon Securities|%%| ZEROS ARE A UNIQUE TWIST ON BONDS Zero coupon securities offer investors good returns and the security of bonds at a significant discount from their par value There are special risks and tax considerations that go with zeros and the everproliferating variety of zeros requires careful study of a number of strategic considerations You will find specific types of zero coupon securities discussed elsewhere in the Encyclopedia 
1:-2081443166:4|%%|Strategic Considerations|%%|Zero Coupon Securities|%%| STRATEGIC CONSIDERATIONS As we have seen zero coupons share many of the characteristics of bonds with one important exception for the investor Since they do not feature regular interest payments they are not an income investment as bonds are but should be considered an appreciation investment It is important to remember however that unlike the growth in value of a stock portfolio or mutual fund the appreciating value of a zero is really a representation of accrued compound interest and is taxed as such not capital gains which are taxed at lower rates There are however a variety of taxfree government zeros available Since zeros are debt instruments the risk involved depends largely on the credit strength of the issuer Zeros backed by government securities like US Treasury bonds have very low credit risk while corporate zeros can be much riskier If the issuer does default you may be out quite a bit because you have not received any interest payments Also as with bonds the real values of zeros depend on how the returns compare with prevailing interest rates a factor that makes zeros quite volatile on the secondary market As a result most investors hold zeros to maturity Now lets summarize what we have learned about zero coupon securities 
-1313657161:-2043341614:6|%%|The Government Wants a Cut of Your Mutual Fund''s Earnings|%%|Taxes in Mutual Funds|%%| THE GOVERNMENT WANTS A CUT OF YOUR MUTUAL FUNDS EARNINGS Of course there is much more to learn about the taxation of mutual funds but our discussion should help you identify taxable income and the forms you will need and prepare you to study the finer points of taxes further There are always little nuances as well as littleknown strategies that you should know if you want to gain the most from your mutual fund Knowing these will help you to avoid being caught unprepared when the government comes to take its share of your earnings For more information on mutual funds see the related tutorials in the Mutual Funds group 
-1313657161:-2043341614:1|%%|Introductory Page to Taxes in Mutual Funds|%%|Taxes in Mutual Funds|%%| TAXES IN MUTUAL FUNDS As you are painfully aware whenever you make money the government usually wants a cut of the action Your mutual fund earnings are no exception In this tutorial you will learn which mutual fund income is taxable and which is taxfree You will also learn about a frequently overlooked situation that can lead to taxation Here are the topics well discuss First we will answer the most common question What kind of mutual fund income is taxed? 
-1313657161:-2043341614:2|%%|What Income in a Mutual Fund Is Taxed?|%%|Taxes in Mutual Funds|%%| WHAT INCOME IN A MUTUAL FUND IS TAXED? The categories of taxable mutual fund income include ordinary dividends capital gains dividends and capital gains on redemption of fund shares Ordinary dividends are dividends or interest passed on to you from the holdings of a fund Funds pay these dividends monthly quarterly or semiannually Prior to 2003 they were taxed at your ordinary income tax rate If you reinvest your dividends they will still be taxed unless they are part of certain retirement plans Although municipal bond funds earn dividends that are usually federally taxfree their dividends may be taxable in your state if the bonds were issued by another state A capital gain is the profit you earn when you redeem fund shares that have risen in value It is important to remember that you only have capital gains after you have sold your shares While they are still in your hands they are only a profit on paper Therefore you are taxed on them only when they are sold Capital gains are either shortterm or longterm Shortterm capital gains are gains on shares that have been held twelve months or less Longterm gains require that the shares be held longer than twelve months At present the tax rates on shortterm gains are the same as the shareholders income tax bracket 10 percent to 35 percent Prior to 2003 the maximum longterm capital gains rate was 20 percent for taxpayers in the upper brackets and 10 percent for those in the 10 percent and 15 percent income tax brackets In 2003 through 2008 those rates are lowered to 15 for those in the 25 percent tax bracket and above Taxpayers in the 10 percent and 15 percent brackets will pay the lower rate of 5 percent on capital gains from 2003 through 2007 and zero percent in 2008 In 2009 unless Congress extends this new law the capital gains rates will revert to the prior 10 percent and 20 percent rates When a mutual fund sells shares of its holdings and earns a profit on them it passes its net profit on to its shareholders as a capital gains dividend You will be taxed at the shortt
-1313657161:-2043341614:3|%%|Which Distributions in a Mutual Fund Are Not Taxed?|%%|Taxes in Mutual Funds|%%| WHICH DISTRIBUTIONS IN A MUTUAL FUND ARE NOT TAXED? The following are not taxed return of capital earnings inside qualified retirement plans and in most cases the income from municipal bond funds and taxexempt money market funds Capital losses may be used as tax deductions Return of capital is the return of a part of your original investment to you It is money that you invested into the fund It is not shares that have been sold and it is not dividend income Returns of capital are not taxed because they are not income However if you receive a return of capital your basis is lowered on all your shares This can result in a higher capital gain when you redeem shares The ordinary earnings of qualified retirement plans are not currently taxed To be qualified means to receive certain tax advantages If you have a 401k plan for example the dividends that it receives are taxexempt This is an incentive for people to leave their money in their plans for very long periods You will pay ordinary income taxes on all distributions from a qualified retirement plan Capital losses occur when you sell shares that have fallen in value to less than what you paid for them For example if you bought a share for 10 and later sold it for 8 you have a capital loss of 2 for that share You are not taxed on capital losses At present you can deduct up to 3000 in capital losses from your income If you have a loss greater than 3000 you may carry the excess over to future years until the loss is depleted The income from municipal bond funds and taxfree money market funds is usually not subject to federal taxes This is because the securities these funds hold are almost never taxable on the federal level Many of them are not taxable on the state level either In addition to simply receiving income there are actions you may take that will incur taxes We will look at one of them next 
-1313657161:-2043341614:5|%%|Tax Forms Involved|%%|Taxes in Mutual Funds|%%| TAX FORMS INVOLVED Our discussion of mutual fund taxes would not be complete without a look at the tax forms you will need when you report your income to the government Each of the forms described below will be sent to you and to the IRS • Form 1099DIV will be sent to you in January It will show you how much ordinary dividend income you earned in the previous year It will also show you your shortterm and longterm capital gains dividends along with any return of capital you received • Form 1099B reports sales of mutual fund shares It reports the gross proceeds of the sales • Form 1099R shows you any withdrawals made from retirement plans Information on taxable income must be transferred to your federal income tax return You will record your dividend income on Schedule B and capital gains and losses on Schedule D We close with a note on the importance of learning about how your mutual funds are taxed 
-1313657161:-2043341614:4|%%|A Mutual Fund Situation That Incurs Taxes|%%|Taxes in Mutual Funds|%%| A MUTUAL FUND SITUATION THAT INCURS TAXES Here is a common situation that causes investors to be taxed often without their realization When you shift money from one fund to another even between funds in the same family the IRS views it as a sale of your shares followed by a new purchase You will be taxed on any capital gains made from the transfer The exception to this is when transfers are made within a qualified retirement plan such as an individual retirement account What would taxes be without paperwork? Next we will look at the tax forms youll need 
-1313657161:-1993107769:2|%%|Some Bond Basics|%%|Introduction to Bond Funds|%%| SOME BOND BASICS Bonds are debt securities They represent money that is borrowed from investors to finance operations and projects Unlike stocks which represent shares of ownership in a company bonds represent money owed to their holders When you buy a bond you become a lender Most pay fixed rates of interest A few pay variable rates that change with the market Bonds are issued with a face value or par They also have a specified maturity date which is the date the issuer repays the principal Bonds can take from one to fifty years to mature Until they mature the bond issuer makes interest payments semiannually quarterly or monthly Investors can buy bonds directly or as part of a mutual fund A bond fund buys bonds and investors buy shares in the fund itself Now that weve reviewed the basics of bonds lets learn what bond mutual funds are 
-1313657161:-1993107769:5|%%|Yield and Total Return in Bond Funds|%%|Introduction to Bond Funds|%%| YIELD AND TOTAL RETURN IN BOND FUNDS The return on bond funds is quoted using two measurements its yield and its total return Though bond funds earn interest from their investments they do not pay interest but dividends You are actually owning shares of an investment company whose business is to invest in bonds and earnings are passed on to you in the form of dividends If a bond fund pays an annual dividend of 060 per share and the current offering price is 1000 the current yield is 6 percent The yield is the percent return on the amount invested Since a bond mutual fund does not have a fixed coupon interest rate the investor must rely upon the current yield as a guide to what the fund will pay Total return is the yield plus or minus any changes in the funds net asset value or NAV—essentially what the value of one share in the fund would be if you were to redeem it The total return helps you understand how the value of income from the funds dividends may be affected by changes in the value of the fund itself Heres an example If a funds net asset value gains 4 percent during a given year and it has a 9 percent yield then its total return is 13 percent If a funds total return is less than its yield we can tell that the fund NAV must have declined For example if a fund with a 10 percent yield has a 3 percent total return we know that its net asset value has dropped by 7 percentage points Investors who are primarily concerned with maximizing current income are most interested in a funds yield Those who care about maintaining the value of their principal are most concerned with the NAV The best way to get a clear comparison between bond funds is to compare yield with yield and total return with total return Finally a wrapup of what we have learned 
-1313657161:-1993107769:4|%%|Types of Bond Funds|%%|Introduction to Bond Funds|%%| TYPES OF BOND FUNDS Almost every kind of bond can be found in one bond fund or another Bonds of each type are usually packaged together For example a fund may include only corporate bonds or international bonds One reason bonds of the same type are packaged together is that they have similar objectives and features • Corporate bond funds are made of bonds issued by companies in the private sector • Zero coupon bond funds are pools of zero coupon bonds which do not pay interest currently Instead they realize income only when they mature • International bond funds invest in debt securities of governments and corporations of other nations • Convertible securities funds invest in debt securities that can be converted into stock Lets look at some more types of bond funds 
-1313657161:-1993107769:6|%%|Bond Funds Are Ready-Made Bond Portfolios|%%|Introduction to Bond Funds|%%| BOND FUNDS ARE READYMADE BOND PORTFOLIOS You should now have a beginning understanding of bond mutual funds the benefits of investing in them and how their value is determined With this understanding you can begin studying bond funds in more depth in other places For more information on bonds be sure to see our other tutorials in this series 
-1313657161:-1993107769:1|%%|Introductory Page to Introduction to Bond Funds|%%|Introduction to Bond Funds|%%| INTRODUCTION TO BOND FUNDS Do you want the income of bonds with the diversification of a mutual fund? Bond funds may be for you This tutorial introduces mutual funds that invest in bonds We will discuss these topics Before we learn about the funds themselves let us cover some basic bond information 
-1313657161:-1993107769:3|%%|What Are Bond Funds?|%%|Introduction to Bond Funds|%%| WHAT ARE BOND FUNDS? Bond funds are mutual funds that invest in bonds and other debt securities A debt security is a loan that must be paid back with interest at the end of a specified period Although there are debt securities other than bonds they make up only a small part of debt investments When investors send money to a bond mutual fund the funds managers use that money to buy bonds and other debt securities Bond funds invest primarily to provide investment income and preserve principal They are conservative in nature except for funds that specialize in highyield bonds Many bond fund managers seek to maintain as little fluctuation as possible in the share prices of their funds As a result bond funds are popular among investors who are looking for current income the safety features of bonds and the diversification of mutual funds Now that you know what a bond fund is we will look at some popular types 
-1546079686:-1678564115:5|%%|What Are Some Advantages of Owning Common Stock?|%%|Introduction to Common Stock|%%| WHAT ARE SOME ADVANTAGES OF OWNING COMMON STOCK? The biggest reason people invest in common stock is their personal financial bottom line Over time nothing has so reliably appreciated in value as common stock Despite downturns recessions and even a few serious crashes the stock market has continued to climb since the New York Stock Exchange opened its doors in 1792 While you may not get rich as quickly and painlessly as discovering oil in your backyard the stock market has continued to provide an overall annualized growth rate over 10 percent over time—with some stocks performing even better In addition weve noted a few other advantages earlier in this tutorial • Voting rights in company elections • Ability to participate in company earnings through dividends But thats not all Another big advantage of owning common stocks is their ability to provide a hedge against inflation—unlike bonds and certain other investments that can lock you into low interest rates The prices of stocks tend to move up right along with the rest of the economy Finally owning common stock can have certain tax advantages For instance a capital loss can be used to offset capital gains You may want to check with your tax professional for details Naturally there also are a few disadvantages to owning common stock We will cover those next 
-1546079686:-1678564115:1|%%|Introductory Page to Introduction to Common Stock|%%|Introduction to Common Stock|%%| INTRODUCTION TO COMMON STOCK Imagine that you have just inherited a small portfolio of common stock from a distant uncle Your new portfolio contains a mixture of common stocks purchased at regular intervals over the past 40 years What is the best way to manage your new portfolio? This tutorial introduces defines and describes the features of common stock To begin well cover what sets common stock apart from other securities and classes of securities 
-1546079686:-1678564115:6|%%|What Are Some Disadvantages of Owning Common Stock?|%%|Introduction to Common Stock|%%| WHAT ARE SOME DISADVANTAGES OF OWNING COMMON STOCK? No doubt the biggest risk of owning common stock is the degree of risk involved although the level of that risk varies greatly according to the soundness history and successful growth of the company Yet there always remains a chance that you will suffer a loss if a company you invest in performs poorly and pays no dividends while the price of its stock plummets That risk of course is part of the price you pay for the prospect of increased profits And unlike a nice safe CD in a commercial bank your investment in common stock is not insured Being able to deduct your loss on your income tax return is small solace for a significant drop in your net worth You will need to spend some time managing your investments even if all you do is review them with your broker two or three times a year Add to that the cost of time and the expenses of filing tax preparation and maybe a computer and software to help you organize everything or perhaps a safe deposit box to store your securities Despite these concerns many people invest in common stocks finding that the positives greatly outweigh the negatives Millions of Americans have overcome the possible disadvantages to buy and own common stocks and to prosper from their growth 
-1546079686:-1678564115:4|%%|What Are Some Different Types of Common Stock?|%%|Introduction to Common Stock|%%| WHAT ARE SOME DIFFERENT TYPES OF COMMON STOCK? Once you have decided to purchase common stock your choices are just beginning Among the numerous alternatives to choose from • Blue chip stocks are issued by wellestablished companies with many years of proven success—like Du Pont General Electric and IBM These tend to be pricy lowerrisk companies and are the top of the line in stocks • Income stocks often are issued by stable companies that do not have a need to constantly reinvest in new development—for example utilities and insurance companies These companies have a long history of paying dividends • Growth stocks generally are issued by young companies or small companies Investors expect rapid growth from them—many technology companies fall into that class Although they may pay low or no dividends they offer the promise of quickly rising stock values • Speculative stocks are issued by new or unknown companies and offer the prospect of large profits—at a high risk This category includes lowpriced penny stocks selling for 5 a share or less These are extremely volatile and some investors are lured into them by disreputable dealers with promises of high gains • Cyclical stocks are stocks that move up or down in sync with the business cycle Examples include the housing industry and industrial equipment companies because these companies serve the needs of growing economies Investors who dont mind buying and selling as the market fluctuates tend to like cyclical stocks Individuals who prefer to hold a stock for a long time may not like them unless they can weather ups and downs in the stocks value • Defensive stocks are those whose prices stay stable when the market declines some even grow What they have in common is that they are issued by industries that naturally do well during recessions Food and utilities companies are defensive stocks Debt collection companies also tend to perform well when the market turns sour Now that we have covered the basics its time to look at some factors to consider when buying common s
-1546079686:-1678564115:2|%%|What Is Common Stock?|%%|Introduction to Common Stock|%%| WHAT IS COMMON STOCK? Stock is your opportunity to own a portion of corporate America A company sells ownership rights to raise money at startup or for expansion purposes It sells these ownership rights as shares—or stocks—in the organization Stock certificates list the name of the owner and the number of shares owned Owners of common stock are entitled to receive distributions of earnings on the principal they have invested in the corporation For instance if the board of directors decides to issue a distribution or dividend of 030 per share at the end of one quarter and you own 100 shares you would receive a dividend of 30 However common shareholders receive a dividend only after the company has distributed a set dividend to preferred shareholders Sometimes you may have the opportunity to reinvest your dividend in additional shares through a dividend reinvestment plan Common shareholders usually have the additional right to vote in elections of company officers and on other key issues such as executive compensation and acquisitions These elections may take place during the corporations annual meeting or at a special meeting Prior to the meeting shareholders receive a proxy notice about the election or other issues on the agenda This notice also usually contains a form for you to complete and return if you would like to assign your voting rights to a proxy who will attend the meeting and vote on your behalf Besides having a voice in the running of the corporation owners of common stock have the opportunity to earn additional profits from appreciation of the stocks value as the company grows Millions of Americans participate in the free market system through stock ownership Read on to learn how you too can purchase stocks 
-1546079686:-1678564115:7|%%|Common Stock Can Provide Growth|%%|Introduction to Common Stock|%%| COMMON STOCK CAN PROVIDE GROWTH Owning common stock provides more than an income to many savvy investors It also can provide control over their own financial future whether that investment is through a retirement plan a mutual fund or on their own To learn more about the details of owning common stock see the other tutorials in the Stocks section 
-1546079686:-1678564115:3|%%|Where Can You Buy Common Stock?|%%|Introduction to Common Stock|%%| WHERE CAN YOU BUY COMMON STOCK? You can buy common stock in several different ways First you can purchase stock from the company as an initial public offering IPO—the companys initial offering of stock when it goes public When you buy IPO stock however you bear the risk of buying securities from a new or very small company that has not been tested in the marketplace You can purchase common stock through a brokerdealer over the counter or on one of the nations organized stock exchanges—the New York Stock Exchange or American Stock Exchange for example—where investors buy and sell shares On the secondary market the prices of stocks can fluctuate rapidly according to the supply of and demand for each companys shares You will pay a sales commission for the transaction If you already own stock in a company that offers a dividend reinvestment plan DRIP you can purchase additional shares this way Sometimes companies allow you to buy additional shares beyond what you could afford to purchase with your dividends alone and some even offer a discount to shareholders You may pay a reduced sales charge or even better no sales charge at all for these transactions Finally you can participate in common stock investing through a mutual fund that invests in stocks Not only are there several methods for purchasing common stock but there also are many types of common stock to choose from 
-1313657161:-1564379781:6|%%|Mutual Funds Offer the Investor Several Advantages|%%|What Do Mutual Funds Offer That Other Investments Do Not?|%%| MUTUAL FUNDS OFFER THE INVESTOR SEVERAL ADVANTAGES Mutual funds can be a convenient reliable choice for all investors With their diversification and professional management you will have less to worry about when you put your money into a mutual fund Because there are so many different types of mutual funds you can choose a fund that matches your investment style and security preferences In this tutorial we defined mutual funds and diversification and explored the ways in which mutual funds are easy to invest For more information on mutual funds read the other tutorials in this section 
-1313657161:-1564379781:2|%%|What Is a Mutual Fund?|%%|What Do Mutual Funds Offer That Other Investments Do Not?|%%| WHAT IS A MUTUAL FUND? A mutual fund is an investment company that pools the money of its investors to buy stocks bonds andor other assets Each mutual fund has its own investment strategy and goals Instead of buying a single stock or bond you are buying a portion of a wide variety of investments Investors buy shares of a fund to become fund shareholders and partake in the losses or gains of the fund on an equal basis The most common type of mutual fund is called an openend mutual fund Openended funds continuously offer shares of their fund directly to shareholders When investors buy shares in an openend fund their money goes directly into the fund When they sell shares money is taken directly out of the fund Openend funds establish a daily value for their shares called the net asset value NAV On the other hand a closedend fund has a limited number of shares available to investors made through an initial offering After the initial offering its shares are traded on an exchange through brokers rather than directly through the mutual fund The prices of closedend shares are determined by supply and demand for the funds rather than changes in market prices of the individual securities that make up the funds Unlike openend funds closedend funds do not redeem their shares You can also invest in mutual funds through a unit investment trust UIT Instead of being traded the securities within a unit investment trust remain fixed throughout the life of the trust Unlike closedend funds UITs may redeem shares from shareholders at the net asset value Investors earn income through interest or dividends earned on the trusts until the securities in the trusts mature are due to be paid out or are liquidated Many funds belong to families of funds that may share common services and management to lower overall operation costs It can sometimes be easier to transfer your shares from one fund to another if you keep your investments within the family Now that you understand what a mutual fund is lets look at how one is run 
-1313657161:-1564379781:3|%%|Professional Management|%%|What Do Mutual Funds Offer That Other Investments Do Not?|%%| PROFESSIONAL MANAGEMENT One nice thing about mutual funds is that they do the investment research for you Mutual fund companies hire fulltime professional managers to conduct research analyze the market and buy and sell securities for the funds The portfolio manager is the person who selects a funds securities Managers buy and sell the investments according to funds investment objectives A funds director contracts with an investment advisor and his or her research staff to manage the fund Fund investment advisors are usually highly educated and have five or more years experience in analyzing securities The advisor usually receives an annual fee based on a percentage of the funds value Sometimes a mutual fund has a management team rather than an individual manager A mutual fund managed by a team may be able to conduct more thorough research than one managed by a single individual Because mutual funds are professionally managed you will have to pay management fees to invest in one Another advantage of mutual funds besides professional management is something called diversification which we will discuss next 
-1313657161:-1564379781:1|%%|Introductory Page to What Do Mutual Funds Offer That Other Investments Do Not?|%%|What Do Mutual Funds Offer That Other Investments Do Not?|%%| WHAT DO MUTUAL FUNDS OFFER THAT OTHER INVESTMENTS DO NOT? For over eighty years mutual funds have made it possible for everyone to enjoy the benefits of investing beyond the neighborhood bank Today there are over 8000 mutual funds available to every type of investor What makes them so popular? In this tutorial you will learn some of the unique features of mutual funds Lets begin by defining mutual funds and exploring a few representative types 
-1313657161:-1564379781:5|%%|Convenience|%%|What Do Mutual Funds Offer That Other Investments Do Not?|%%| CONVENIENCE Buying shares directly from a mutual fund tends to be cheaper than buying single stock shares yourself This is because mutual funds buy or sell thousands of shares a day reducing transaction costs dramatically To buy or sell shares from a mutual fund you make an initial deposit to open an account You can buy or sell shares from the money in your account over the phone or online When you redeem your fund shares youll receive a check for the net asset value NAV of the shares You can redeem your shares for cash anytime also via the phone or online The funds from your redemption are usually available within a day or two and can be wired directly into your bank account Some funds allow you to receive regularly scheduled withdrawal checks Dividends can be received in cash or reinvested back into the fund to buy more shares Proceeds from redemption of shares are subject to capital gains tax if you redeem them at a profit For even more convenience you can participate in a mutual funds automatic investment program to purchase mutual fund shares on a regular basis With automatic investment a fixed amount of money is automatically taken out of your bank account on a regular basis to buy shares It is just as easy to choose a fund from a fund family that matches your investment style and risk tolerance Different types of funds have different risk levels and investment strategies Some seek maximum growth of capital while others seek high interest returns still others try to balance both objectives You can choose from aggressive growth funds growth and income funds and fixedincome funds Mutual fund companies are required to send you a fund prospectus containing necessary information about each mutual fund The most important areas to look at in a prospectus are investment objective management costs and performance All of this information is usually found in the first few pages of the prospectus To conclude this tutorial lets summarize the ways in which a mutual fund offers an investor a complete investment package 
-1313657161:-1564379781:4|%%|Diversification|%%|What Do Mutual Funds Offer That Other Investments Do Not?|%%| DIVERSIFICATION Mutual funds invest in a wide variety of securities in different industries Spreading investments across different types of securities and areas leads to lowered risk This is called diversification Diversifying works because not all types of securities respond the same to overall market changes When some securities fall others may increase in value Losses from some securities are offset by gains in others This allows your investment to remain stable despite the ups and downs of different markets Diversifying makes mutual funds less risky than investing solely in one type of investment In other words its a great way to avoid putting all your eggs in one basket By diversifying in different stocks within the same industry you protect yourself from one companys financial hardships When you diversify among stocks in different industries you protect yourself from a downtrend in any one particular industry By diversifying among stocks bonds and cash you protect yourself against overall economic trends that may adversely affect one particular type of security as compared to another However diversification does not guarantee that your mutual fund will not lose money in the market Now lets look at how easy it is to invest in a mutual fund 
906223151:-1547961371:5|%%|Some Final Words on Risk|%%|The Risk Premium and the Risk-Free Rate|%%| SOME FINAL WORDS ON RISK The concept of a riskreturn relationship guides investment strategy The world of investing provides a spectrum of risks and returns On the lowrisk end of the spectrum you have riskfree US Treasury bills which provide a minimal return On the highrisk side you have stocks which are more precarious but provide higher average returns The concept of the risk premium is fundamental to the pricing of securities Each class of securities is presumed to carry a different level of risk Without a higher rate of return there would be no incentive for investors to put their money into riskier investments By understanding the various risks associated with investments you will be able to understand why certain investments have higher returns You can then compare the potential risks and returns of an investment using tools such as the Capital Asset Pricing Model CAPM The riskfree rate and the risk premium are two of the fundamental components of the relationship between risk and return understanding these concepts will serve you well as you make investment decisions For more information on risk see our other tutorials on the subject 
906223151:-1547961371:3|%%|Why Would Anyone Want to Take a Risk? The Risk Premium|%%|The Risk Premium and the Risk-Free Rate|%%| WHY WOULD ANYONE WANT TO TAKE A RISK? THE RISK PREMIUM Investing is risky So why dont you just leave your money in the bank? The answer of course is that by taking a risk you hope to have greater rewards This simple concept is the backbone of investing The risk premium is the amount by which the rate of return on a risky investment exceeds the rate of return on a less risky investment The extra return on the risky investment compensates the investor for taking on risk The rate of return on an investment with zero risk is called the riskfree rate US Treasury bills carry so little risk they are said to be riskfree investments therefore we can use the rate of return on Tbills to approximate the riskfree rate If you are investing in any firm less reliable than the US Government you expect your returns to increase along with the risk To better understand these concepts lets look at some numbers The next section offers you a view of rates of return for various classes of assets 
906223151:-1547961371:4|%%|Approximations of Risk Premiums and the Risk-Free Rate|%%|The Risk Premium and the Risk-Free Rate|%%| APPROXIMATIONS OF RISK PREMIUMS AND THE RISKFREE RATE Because US Government securities have virtually no default risk due to the Governments ability to raise taxes or print money these assets are referred to as riskfree As such their current rate of return is used as a proxy for the riskfree rate Investors face different types of risks Equity risk small stock risk bond default risk and bond horizon risk all have premiums that reward investors with larger average returns for taking such risks Ibbotson Associates calculated total nominal returns compounded annually for various asset classes for the years 1926 through 1998 Their results will give you a good idea of the average premium awarded for taking on risk • Treasury bills 38 • Intermediateterm government bonds 53 • Longterm government bonds 53 • Longterm corporate bonds 58 • Largecompany stock returns 112 • Smallcompany stock returns 124 As you can see the return for investing in large company stock returns has been much larger than the return provided by Treasury bills In this case the investor was rewarded for taking on equity risk Similarly the higher return provided by small stocks in relation to large stocks is a premium for taking on small stock risk Notice that the return on longterm corporate bonds was higher than the return provided by longterm government bonds This is a premium for taking on bond default risk You can also see that the risk premium on bond horizon risk resulted in a higher return for intermediate and longterm government bonds compared to shortterm Treasury bills In each of these cases risk has been rewarded by higher returns Of course this data is a compilation of many assets over the course of 73 years The future is never predictable but these historical returns should give you a sense of how various risks are rewarded 
906223151:-1547961371:1|%%|Introductory Page to Risk Premium and the Risk-Free Rate|%%|The Risk Premium and the Risk-Free Rate|%%| THE RISK PREMIUM AND THE RISKFREE RATE Are you a risktaker? Some people love to take risks but most of us are riskaverse Sure we riskaverse people might take a gamble occasionally but we certainly expect to be compensated for that risk This notion of being compensated for taking on risk is one of the cornerstones of investment theory In this tutorial on risk and risk premiums you will learn about the following topics Lets get started by identifying some specific risks in the world of investments 
906223151:-1547961371:2|%%|What Is Risk?|%%|The Risk Premium and the Risk-Free Rate|%%| WHAT IS RISK? In the investment world risk refers to an uncertain return on your investment When you make an investment you may lose your money or at least not see any gains Generally people try to match their desired return with an acceptable level of risk Some of the specific risks investors may face include the following • Bond default risk This is the risk that the issuer of a bond will not be able to meet its debt obligations If a company goes bankrupt you may lose your entire investment • Bond horizon risk Investors view longerterm bonds as being riskier and therefore demand higher returns This is because the prices of longterm bonds are more sensitive to interest rate changes • Inflation risk When you invest in bonds there is always the risk that inflation will lower or eliminate the purchasing power of your returns Future inflation is always uncertain and therefore your real rate of return is also uncertain • Equity risk This is the risk you undertake when you buy stocks A stock may lose its value If the value of a share falls below the price you paid for it you are losing money • Small stock risk Market returns for small stocks are very volatile Smallcap stocks are stocks in companies with relatively low funding or capitalization Smallcap companies are also more likely to go bankrupt For these reasons smallcap stocks are generally considered riskier than largecap stocks With all these risks involved in investing why invest? The answer lies in the concept of risk premium which is our next topic 
-1313657161:-1484967623:7|%%|The Role of Shareholders in a Fund''s Operation|%%|Organization and Management of Mutual Funds|%%| THE ROLE OF SHAREHOLDERS IN A FUNDS OPERATION Shareholders need not sit idle as their funds operate Indeed they have the opportunity to influence the decisions and leadership of their funds Each mutual fund share counts as one vote The more shares you own the more votes you can cast As noted earlier the shareholders elect the board of directors Among their other responsibilities • They vote on changes in the funds investment objectives • They vote on or approve restrictions on investments • They approve changes in policy • They approve the investment advisory agreement Shareholder voting affects the investment behavior of the fund and its managers Now some final words about the necessity of knowing who runs mutual funds 
-1313657161:-1484967623:8|%%|Many Professionals Are Involved in Mutual Funds|%%|Organization and Management of Mutual Funds|%%| MANY PROFESSIONALS ARE INVOLVED IN MUTUAL FUNDS Through this discussion of mutual fund management you should be able to identify the major parties involved in managing a mutual fund as well as the roles each of them play While the details of mutual fund management may seem irrelevant to your investment decisions these are in fact important things to know Other people are handling your money Their actions will influence what happens to it You will be able to play an intelligent role as a voting shareholder if you understand how your vote fits in with the big picture of fund management By reading your prospectus you can also learn the titles and even some of the names of the parties involved in managing your fund Learn more about the mutual fund prospectus in the tutorial on that subject 
-1313657161:-1484967623:2|%%|The Management Company|%%|Organization and Management of Mutual Funds|%%| THE MANAGEMENT COMPANY The management company of a mutual fund creates the mutual fund and manages its operations In most cases the management company also acts as investment advisor As an investment advisor a management company buys and sells the funds stocks bonds and other investments It acts according to the policies of the fund The investments it chooses must fit the funds objectives For example if a fund is designed to achieve growth the management company will look for study and buy investments that offer the right kind of growth potential Another responsibility of the investment advisor is to ensure that the fund is appropriately diversified It may alter the percentages of each holding or of each security according to trends in the market as a whole Compensation for the funds managers comes out of the assets of the fund through management fees which are detailed in the funds prospectus The prospectus also includes information about the management company and its key decision makers Now a short discussion of the people who sell you your shares 
-1313657161:-1484967623:4|%%|The Custodian|%%|Organization and Management of Mutual Funds|%%| THE CUSTODIAN The custodian of a mutual fund safeguards the funds money and other physical assets This party is usually a bank In addition to ensuring that assets are in safe keeping the custodian takes care of bookkeeping and other clerical tasks The custodian takes in investors payments and holds the fund shares as an accounting book entry The custodian may also calculate the net asset value of the funds shares at the end of each day To make sure that there is no conflict of interest or illegal activity the fund chooses an independent party to be the custodian This party takes no part in the funds investment decisions Next we will look at the transfer agent 
-1313657161:-1484967623:3|%%|The Distributors|%%|Organization and Management of Mutual Funds|%%| THE DISTRIBUTORS The distributors of a mutual fund actually sell shares to the public Some distributors are part of the fund and simply sell directly to the public Others are brokerage houses Brokerage houses that distribute shares are called underwriters They handle customers orders to buy and sell shares Distributors may team up with other brokerages to market a fund This teaming up results in a selling group When you contact a fund for sales literature you are dealing with the distributor To learn who guards your money go to the next screen to learn about the funds custodian 
-1313657161:-1484967623:1|%%|Introductory Page to Organization and Management of Mutual Funds|%%|Organization and Management of Mutual Funds|%%| ORGANIZATION AND MANAGEMENT OF MUTUAL FUNDS For a mutual fund to work effectively a number of individuals and groups must work together Learning about the parties that manage your mutual fund need not be boring It can give you a perspective on those people to whom you are entrusting your money It can also help you to understand the value of the fees you are charged Learning about how a fund is organized and about who runs it can help you make wiser investment choices In this tutorial we will introduce you to those who run mutual funds We will begin with the party that runs the show 
-1313657161:-1484967623:6|%%|The Board of Directors|%%|Organization and Management of Mutual Funds|%%| THE BOARD OF DIRECTORS Each mutual fund has a board of directors The board retains a management company to manage the fund It chooses an underwriter or distributor to distribute shares The board also chooses a custodian to perform bookkeeping and clerical tasks The members of the board must sign the investment advisory agreement which must be approved by the shareholders The investment advisory agreement is a contract between the fund and the investment advisor The shareholders of the fund elect the board of directors at the annual meeting Each shareholder receives a proxy ballot by mail to use to cast his or her votes Now we come to what you as an investor can do for your fund 
-1313657161:-1484967623:5|%%|The Transfer Agent|%%|Organization and Management of Mutual Funds|%%| THE TRANSFER AGENT The transfer agent has several duties related to the issuing and canceling of mutual fund shares It is responsible for the following duties • Maintaining shareholder records • Issuing new shares • Receiving and canceling redeemed shares • Changing the registration of shares that have been transferred The transfer agent also sends out dividend and capital gains distributions Further it issues proxy ballots and periodic reports to shareholders Since the duties of the transfer agent are closely related to those of the custodian the custodian often acts as the transfer agent of a fund The next player we will discuss is the board of directors 
906223151:-1459968605:6|%%|You Can Negotiate Prices on the Over-The-Counter Market|%%|The Over-the-Counter Market|%%| YOU CAN NEGOTIATE PRICES ON THE OVERTHECOUNTER MARKET The overthecounter market is the sector of the secondary market in securities in which trades are negotiated directly between buyers and sellers rather than auctioned as they are at an exchange The NASD provides a degree of regulation and order to the overthecounter market and the NASDAQ replaces some of the immediate market feedback lost through negotiated trading Because overthecounter stocks do not have to meet the stringent listing requirements of the exchanges small new companies often make their debuts here You will find separate tutorials on many of the topics we have discussed here elsewhere in the Encyclopedia 
906223151:-1459968605:5|%%|The NASDAQ|%%|The Over-the-Counter Market|%%| THE NASDAQ If you have seen NASDAQ quotes listed in newspapers and on television you may have assumed it was another stock exchange like NYSE and AMEX But the NASDAQ—the National Association of Securities Dealers Automated Quotations system—is actually a computer network that links NASD members NASDAQ dealers are called market makers They make markets by agreeing to buy and sell given securities from their own accounts More than 600 dealers trade more than 15000 different stock and bond issues over the NASDAQ While NASDAQ securities are traded over the counter not all overthecounter securities are listed on the NASDAQ The NASDAQ provides brokers and dealers with immediate information about the quotations of dealers on various securities along with the number of shares of each security the dealer is prepared to trade By keeping track of the quotations of all of the dealers with positions in a given security it is possible to get a sense of what the current market value is for that security Developed in 1973 the NASDAQ became the first electronic stock market and it now has imitators around the world The fast and comprehensive information provided by the NASDAQ serves some of the information role played by open outcry bidding at exchange auctions and helps traders better judge the changing values of OTC securities Lets summarize what we have learned 
906223151:-1459968605:4|%%|The NASD|%%|The Over-the-Counter Market|%%| THE NASD The National Association of Securities Dealers NASD was established to comply with the Maloney Act a 1938 law that called for selfregulation of the overthecounter securities market The NASD is a membership organization supervised by the Securities and Exchange Commission and virtually all OTC firms are members The NASD serves a function for OTC trading that a board would serve for an exchange It establishes standardized trading practices for its members as well as moral and ethical standards for brokers and dealers It also establishes and enforces rules for OTC trading and includes a disciplinary body to enforce its rules NASD member firms have to undergo periodic examinations and audits to ensure that they meet NASD standards which include maintaining an excess of assets over current liabilities In this way the NASD provides order and regulation to the OTC market leading to greater investor confidence Now that you know about the NASD you are just a few letters away from the NASDAQ the topic we will turn to next 
906223151:-1459968605:3|%%|What Kinds of Securities Are Traded on the Over-the-Counter Market?|%%|The Over-the-Counter Market|%%| WHAT KINDS OF SECURITIES ARE TRADED ON THE OVERTHECOUNTER MARKET? Securities traded over the counter are primarily stocks and bonds Virtually all government and municipal bonds are traded on the OTC market In addition corporate stocks and bonds are traded here as well Any company can sell its securities on the OTC market This is another distinction between OTC trading and the trading on stock exchanges where companies must apply to be listed and where the exchange board regulates which companies may be traded Because they are not listed with an exchange companies traded exclusively over the counter are often called unlisted companies Companies whose stocks are traded over the counter often do not meet the listing requirements of the stock exchanges which typically require companies to meet minimum levels of annual net income along with a minimum number and value of outstanding shares As a result OTC companies tend to be smaller and newer than companies listed on exchanges And you are not likely to find blue chip stocks the highly reliable stocks of older established powerhouses like General Motors or IBM on the overthecounter market Some larger companies do prefer to be traded OTC and it is possible to find exchangelisted stocks traded over the counter referred to as third market trading Even though it occurs outside an exchange OTC trading is still subject to regulation We will learn about who regulates it and how next 
906223151:-1459968605:2|%%|What Is Over-the-Counter Trading?|%%|The Over-the-Counter Market|%%| WHAT IS OVERTHECOUNTER TRADING? The overthecounter or OTC market is part of the secondary market for securities ie where securities are traded after they have been issued by companies or governments The OTC market is sometimes called the negotiated market because unlike exchanges where securities are sold through outcry auctioning trades on the OTC market are negotiated directly between buyers and sellers usually over the telephone or through a computer network The difference is an important one When a trade happens on the floor of an exchange everyone in the trading area and soon people all over the world knows the number of shares that changed hands and the price that was paid for them With negotiated trading limited information is available about what price a share is commanding in the market at that moment and there is usually a greater time delay Many investment experts believe this makes auction trading more immediately sensitive to market pressures OTC trading takes place among brokers who arrange transactions between buyers and sellers and dealers people and firms in the securities business that own securities and trade for their own accounts Dealers quote two prices for a security the bid price which is the highest price a dealer will pay for a share of a security and the asked price the lowest price the dealer is willing to sell a share of the security for The two prices together constitute the dealers quotation on that security and the difference between the two is called the spread Brokers and dealers negotiate the actual price on any transaction in the spread between bid and asked prices In addition to differences in the way securities are traded there are some distinctions between the OTC market and exchanges in the kinds of securities traded We will discuss those differences next 
906223151:-1459968605:1|%%|Introductory Page to The Over-the-Counter Market|%%|The Over-the-Counter Market|%%| THE OVERTHECOUNTER MARKET Because it is often the birthplace for hot new stock offerings the overthecounter market is where many investors look for exciting investment opportunities What is the overthecounter market and how does it differ from other markets for securities trading? We will examine the basic features of this sector of the securities market in this tutorial So where is this counter? We will start by learning what the overthecounter market in securities is 
-1546079686:-1314931395:7|%%|When Preferred Shareholders May Vote|%%|Stockholder Rights and Privileges|%%| WHEN PREFERRED SHAREHOLDERS MAY VOTE Preferred stock promises dividends and a claim on a companys assets that is above that of common shareholders The tradeoff may be that preferred shareholders cannot vote or exercise other specified rights As a rule potential investors should read the terms of a preferred stock offering to learn what voting rights it offers Voting rights often vary from one company to the next The rights of preferred stockholders are not universal as those of common stockholders are Preferred stockholders may be limited to voting only in the following situations • When the company wants to merge with another • When the company wants to liquidate a large portion of its assets • When the company wants to issue new bonds or preferred stock Next we will briefly point out some more shareholder rights and privileges 
-1546079686:-1314931395:1|%%|Introductory Page to Stockholder Rights and Privileges|%%|Stockholder Rights and Privileges|%%| STOCKHOLDER RIGHTS AND PRIVILEGES For some investing in stock is as engaging as watching the grass grow However it need not be As a stockholder you have a number of rights and privileges that can make your voice in a company an active one With the rights accorded you as an owner you can help form the direction in which your company moves The purpose of this tutorial is to explain the major rights and privileges that you as a stockholder have Our discussion of stockholder rights and privileges begins with a look at voting 
-1546079686:-1314931395:2|%%|Voting Rights|%%|Stockholder Rights and Privileges|%%| VOTING RIGHTS Owners of common stock have the right to vote on company matters For example they can vote on whether the companys objective should be changed Shareholders also elect the companys board of directors at its annual meeting Companies may want to reduce the price of their common stock so that it is more affordable to the public In that case they need the vote of common stockholders to approve a stock split Owners of common stock may also vote on whether the company should issue senior securities Senior securities include bonds and preferred stock They are called senior because in the event of the companys liquidation holders of these securities will receive a share of the companys assets before common shareholders will Shareholders however cannot vote on whether dividends should be distributed Only the companys board of directors may issue a dividend Owners of preferred stock usually have limited voting rights however some kinds of preferred stock confer voting rights as well Now we will look at how shareholders vote 
-1546079686:-1314931395:6|%%|The Right to Transfer Ownership|%%|Stockholder Rights and Privileges|%%| THE RIGHT TO TRANSFER OWNERSHIP A shareholder has the right to sell his or her stock to another buyer This is called secondary trading and it takes place on an exchange or through the overthecounter market Buyers and sellers usually trade through brokers To sell stock shares the present owner may sign a stock power which is a form used to endorse a sale Then the owner delivers the stock power and the shares to the buyer Alternatively an owner may sign the back of the stock certificates instead and then deliver them to the buyer The buyers name must be recorded by the company The right to transfer ownership allows the stockholder to cease or reduce participation in ownership of the company Most of the voting rights discussed thus far are accorded to owners of common stock The voting rights of preferred stockholders are frequently curtailed Nevertheless there are situations when they may vote We will discuss those next 
-1546079686:-1314931395:9|%%|As a Stockholder, You Do More Than Just Own Stock|%%|Stockholder Rights and Privileges|%%| AS A STOCKHOLDER YOU DO MORE THAN JUST OWN STOCK To make your investing experience a more involved one be sure to exercise all the rights you have You know the differences in rights between common and preferred shareholders Whichever type of stock you own you now know that investing is not just a waiting game You are an owner and you can influence your company More detailed discussions of common and preferred stock can be found in our other tutorials 
-1546079686:-1314931395:4|%%|Pre-Emptive Rights|%%|Stockholder Rights and Privileges|%%| PREEMPTIVE RIGHTS Preemptive rights give shareholders the right to keep their proportionate ownership of the company If the company offers a new issue of stock to the public shareholders are accorded the right to buy new shares to keep their percentage of ownership the same Preemptive rights let common shareholders buy new shares of stock before nonshareholders may thereby allowing them to maintain voting control share of earnings and share of assets They must be exercised within 45 days and if they are not the company may sell the stock to nonshareholders Preemptive rights are also called rights of first refusal In addition to their rights of ownership and voting shareholders have rights should their company dissolve We will discuss this next 
-1546079686:-1314931395:3|%%|How Shareholders May Vote|%%|Stockholder Rights and Privileges|%%| HOW SHAREHOLDERS MAY VOTE Most shareholders use a proxy which is an absentee ballot sent in by mail They are entitled to one vote for each share owned Shareholders are allowed to revoke or change their ballots before the date of the election There are two methods of voting for board members The statutory method provides one vote per share for each empty seat this method benefits those who hold many shares The cumulative method allows shareholders to cast all their votes for one candidate or distribute their votes among many candidates For example if five directors were to be elected an owner of 30 shares of stock with the cumulative voting right would have 150 votes that he or she could cast for one director or spread among the five directors The cumulative method benefits those who do not own many shares Often minority shareholders band together to cast their votes for one candidate to assure they have representation on the board of directors Shareholders need not fear losing their ownership when their company issues more stock Next well explain what happens to shareholder rights when more stock is issued 
-1546079686:-1314931395:8|%%|Other Rights and Privileges|%%|Stockholder Rights and Privileges|%%| OTHER RIGHTS AND PRIVILEGES Shareholders may have other rights and privileges in addition to voting rights For example Shareholders have access to the companys records They may view them for any reason Shareholders also of course have the right to receive dividends when the company makes a profit Dividends are not guaranteed however The board of directors must declare them Shareholders may bring legal action against the companys management team if they feel that the management has acted illegally or without proper authorization from shareholders Lets review what we have learned 
-1546079686:-1314931395:5|%%|The Right to Receive Assets in the Event of Liquidation|%%|Stockholder Rights and Privileges|%%| THE RIGHT TO RECEIVE ASSETS IN THE EVENT OF LIQUIDATION Stock shareholders always have the right to receive distributions of any remaining assets if the company goes out of business However they are last in line for this assetclaiming privilege Should the corporation issuing the stock go bankrupt and have to sell its assets preferred stockholders will receive the assets before common shareholders will Both groups are at the end of the order The Internal Revenue Service receives assets first Bondholders and creditors receive them next and holders of the companys stock come last As a shareholder you also have the right to sell your stock On the next screen we will look at that in more detail 
1:-1203239792:4|%%|What Are Fannie Maes and Freddie Macs?|%%|U.S. Government Agency Bonds|%%| WHAT ARE FANNIE MAES AND FREDDIE MACS? Ginnie Maes cousins Fannie Mae and Freddie Mac differ primarily in that instead of being government agencies operated through the US Department of Housing and Urban Development they are former federal agencies that became independent entities and are now even listed on the New York Stock Exchange NYSE Yet they retain many government connections and support in the form of favorable interest rates low capital requirements and tax exemptions Fannie Mae got its start during the Great Depression when Congress created the Federal National Mortgage Association in 1938 to make more dollars available for home loans to middle and lowincome citizens In 1960 Fannie became partially separated from the government then later went public and was listed on the NYSE in 1970 Yet some government connections remain and five of Fannie Maes 18member board of directors are appointed by the US President Congress chartered Freddie Mac in 1970 and it went fully public in 1989 The youngster in the family Freddie Mac has a smaller share of the mortgage market But partly because of its smaller market share it is currently growing faster than Fannie Mae is Freddie Mac and Fannie Mae create mortgage pools that are somewhat larger than those of Ginnie Mae and investors look to them to also provide a relatively high return compared to other government securities Proceed to the next section to learn more about the earnings possible through US Government agency bonds 
1:-1203239792:1|%%|Introductory Page to U.S. Government Agency Bonds|%%|U.S. Government Agency Bonds|%%| US GOVERNMENT AGENCY BONDS While many people are more familiar with US savings bonds and Treasuries US Government agency bonds also can contribute to your investment portfolio In this tutorial you will meet three key members of the government agency bond family—Ginnie Mae issued by the Government National Mortgage Association GNMA Fannie Mae issued by the Federal National Mortgage Association FNMA and Freddie Mac issued by the Federal Home Loan Mortgage Corporation FHLMC Specifically you will read about the following topics First lets define this type of investment 
1:-1203239792:5|%%|What Can You Expect to Earn From Agency Bonds?|%%|U.S. Government Agency Bonds|%%| WHAT CAN YOU EXPECT TO EARN FROM AGENCY BONDS? Investors who purchase US Government agency bonds often point out that over time they tend to perform somewhat better than Treasury securities Yet when fewer US treasuries are issued government agency bonds also can fill the need for these types of investments Contrarians will argue that the volatility of government agency bonds makes them a poorer investment than say bluechip stocks This volatility stems from the possibility that a number of home owners represented in the pool might decide to prepay their mortgages for any number of reasons They may sell their home refinance it if mortgage interests rates fall or simply decide to pay down the principal When a number of mortgages in the pool are paid before maturity the investor receives payments of interest and principal sooner than planned This can be a problem if the investor had counted on a certain fixed rate of return and if the investment matures early at a time when interest rates on similar investments are low Yet many investors continue to purchase Ginnie Maes Fannie Maes and Freddie Macs attracted by their respectable longterm performance and low risk of default Just as important to some investors as return is the issue of safety And that is the topic of the next section 
1:-1203239792:3|%%|What Is a Ginnie Mae?|%%|U.S. Government Agency Bonds|%%| WHAT IS A GINNIE MAE? The Government National Mortgage Association GNMA operates as an agency of the US Department of Housing and Urban Development It buys home mortgages from the financial institutions that made these loans and groups them into pools of 1 million or more Ginnie Mae either keeps these pools to sell directly to investors or sells the pools to mortgage bankers and other institutions which market them to investors Ginnie Mae or the mortgage banker continues to collect mortgage payments from the homeowners in each pool and when you invest in a Ginnie Mae you usually receive a monthly payment that includes both interest and a portion of the outstanding principal Alternatively you may receive monthly payments including only interest and then receive the principal back when the mortgage matures These government agency bonds are also sometimes called Ginnie Mae passthrough securities since the mortgage payments pass through a bank which takes a fee before passing the remainder of the payments to investors Besides providing a higher return than Treasury notes and having the US Governments backing against default Ginnie Maes have another advantage They are highly liquid and can be resold on the secondary market The minimum investment for a Ginnie Mae is generally 25000 Thereafter the securities are available in increments of 1 Of course you sometimes can buy Ginnie Maes that are selling for less than 25000 at a discount on the secondary market if their interest rates are low compared to more recent issues or if their principals have been substantially reduced Finally you can purchase shares in Ginnie Mae mutual funds for less than 25000 Ginnie Mae funds or investment trusts buy these government agency bonds and offer shares to the public In addition to individual investors a wide variety of organizations buy Ginnie Maes for example retirement pension funds credit unions real estate investment trusts commercial banks insurance companies and corporations Likewise many different types of institutions issue G
1:-1203239792:6|%%|How Safe Are Investments in Government Agency Bonds?|%%|U.S. Government Agency Bonds|%%| HOW SAFE ARE INVESTMENTS IN GOVERNMENT AGENCY BONDS? While agency bonds are extremely solid investments backed implicitly by the US Government they are of course slightly less solid than investments in Treasury securities And because Ginnie Mae is operated through a US agency—the Department of Housing and Urban Development—its bonds are considered slightly more solid than those of Fannie Mae and Freddie Mac Both Fannie Mae and Freddie Mac are former government agencies that now are publicly traded companies chartered by Congress For all practical purposes however all of these securities are as strong as Plymouth Rock Yet investors in US Government agency bonds still face certain risks Perhaps the biggest of these is the prepayment risk Prepayments directly affect an investments average life and yield And accurately predicting the home mortgage interest rates five or more years out is as much of a challenge as correctly forecasting a bull or bear market Just the opposite happens when mortgages in the pool mature more slowly If fewer homeowners sell their home or refinance for instance the average life of the investment grows longer than planned This extension risk reduces the amount of money with which the investor has to buy other securities at a time of high interest rates Investors who trade US Government agency bonds on the secondary market also face market risk—much as they would with common stocks The value of their investment can vary according to such factors as changing interest rates time to maturity and liquidity Despite these risks many individual investors and organizations buy US Government agency bonds They believe that the low likelihood of default coupled with a generally reasonable return compensates them for the potential volatility and other risk factors We have now covered several key topics about US Government agency bonds It is time for a review 
1:-1203239792:2|%%|What Is an Agency Bond?|%%|U.S. Government Agency Bonds|%%| WHAT IS AN AGENCY BOND? You can buy various securities issued by governmentsponsored and governmentowned corporations thatstrictly speakingare not actually a part of the US Government These agencies are affiliated with but separate from the US Government This tutorial will introduce you to three of these agenciesthe Government National Mortgage Association GNMA the Federal National Mortgage Association FNMA and the Federal Home Loan Mortgage Corporation FHLMCalthough there are several other less wellknown agencies that also issue bonds These include World Bankrelated agencies and those that package student loans The three agencies nicknamesGinnie Mae GNMA Fannie Mae FNMA and Freddie Mac FHLMCrefer to the agencies bonds as well as to the agencies themselves Because of their government affiliation agency bonds are very secure essentially backed by the full faith and credit of the US Government Also thanks to their government affiliation agencies receive favorable treatment in several arenas They receive low interest rates on money they borrow have low capital requirements and are exempt from most state and local taxes As a result government agencies sometimes can offer investors more favorable bond earnings than would otherwise be possible GNMA FNMA and FHLMC all buy mortgages from financial institutions that make loans and then they group them into pools They then sell unit shares in these pools to investors For example suppose you buy a house or apartment building taking out a mortgage loan to complete the deal The term of the loan may vary from 15 to 30 years and the interest rate may be fixed or adjustable A government mortgage agency then may buy your mortgage from your bank and combine it with other mortgages to create a pool of 1 million or more The agency then may issue bonds on these pools through financial institutions marketing them through brokers The bonds thus raise additional capital for the agency to replenish its resources as well as to buy and support additional mortgages Agency bonds generally o
1:-1203239792:7|%%|Invest in Federal Agencies With Government Bonds|%%|U.S. Government Agency Bonds|%%| INVEST IN FEDERAL AGENCIES WITH GOVERNMENT BONDS Looking back US Government agency bonds have evolved considerably over the years Ginnie Mae Fannie Mae and Freddie Mac all began their existence as federal agencies While the first is still operated under the US Department of Housing and Urban Development the latter two have become much more independent entities And the future promises additional changes Among the possibilities Fannie Mae and Freddie Mac are considering mortgages that could be portable from one house to the next or mortgages with rates that drop when the owner regularly pays on time Stay tuned The world of personal finance continuously offers new landscapes and shifting panoramas For more information on US Government agency bonds you may want to see other tutorials on such topics as bond mutual funds and government bonds 
-1313657161:-1117876393:1|%%|Introductory Page to Introduction to Mutual Fund Prospectuses|%%|Introduction to Mutual Fund Prospectuses|%%| INTRODUCTION TO MUTUAL FUND PROSPECTUSES A prospectus is an invaluable information source for any mutual fund investor Its your key to the assets management and investment strategy of the mutual fund This tutorial introduces the major parts of mutual fund prospectuses the information they contain and how they can help you choose a mutual fund for yourself This tutorial covers only openended funds which are funds whose shares are sold back to them instead of to other investors We will discuss the following aspects of prospectuses Before we get into the major parts lets first find out what a prospectus is 
-1313657161:-1117876393:8|%%|Read Your Prospectus Thoroughly|%%|Introduction to Mutual Fund Prospectuses|%%| READ YOUR PROSPECTUS THOROUGHLY You can obtain a prospectus from several sources • Brokers—The prospectuses they have available are usually for funds they offer their customers • The company—You can get one through the mail by writing to the fund or by calling the fund Many have tollfree numbers • The Internet—Many funds post their prospectuses on their Web sites What we have described in this tutorial are the major parts of the document There are other items as well Some funds even include advice on how to invest in mutual funds although they stop short of advertising themselves By understanding the contents of a mutual fund prospectus you will be better prepared to decipher your next prospectus and choose a mutual fund for yourself 
-1313657161:-1117876393:3|%%|The Fund''s Objectives|%%|Introduction to Mutual Fund Prospectuses|%%| THE FUNDS OBJECTIVES The investment objectives of the fund are stated in their own section The title of the section may be Investment Objectives or Investment Policies or something similar The section outlines the funds investment philosophy and strategies so that investors know what a fund is seeking and how it intends to achieve it The section on objectives tells you what the fund is seeking to obtain for its shareholders For example the objective of an income fund may state The XYZ Bond Income Fund seeks a high level of current income with a low degree of shareprice fluctuation The example objective above tells investors these two things • The level of income the fund seeks high moderate or low • How stable it wants its shares to stay Understanding the funds objectives will help you determine whether a particular fund fits with your investment strategy Our next discussion looks at the section of the prospectus that tells you who is involved in the handling of your money 
-1313657161:-1117876393:2|%%|What Is a Prospectus?|%%|Introduction to Mutual Fund Prospectuses|%%| WHAT IS A PROSPECTUS? The prospectus is the document that describes a mutual fund All mutual funds must provide prospectuses to whoever requests them Although it contains information investors need to evaluate a fund the prospectus is not an advertising piece and may not legally advise people to invest in the fund Although prospectuses can make for rather dry reading it is important that you read the prospectus before you invest in a fund The funds management team objectives and performance history and much more are included so that investors will have a clear understanding of the investments they are choosing It may sound surprising but todays prospectuses are easier to read than those of the past Their language gets simpler as time goes on However much of the legal and financial language used in prospectuses is there to protect the investor from misconstruing the nature of the fund and its operations Prospectus language must be exact and its words must be very clear Each prospectus has a philosophical side too We will discuss that next 
-1313657161:-1117876393:7|%%|Other Information|%%|Introduction to Mutual Fund Prospectuses|%%| OTHER INFORMATION There is much more to a prospectus than what has already been described Below is more information to be found in a prospectus The introduction to the fund briefly describes the fund and some basic information about it The introduction includes the address and various telephone numbers of the fund The introduction also includes a disclaimer which tells you that the securities in the fund have neither been approved nor disapproved of by the Securities and Exchange Commission SEC It also states that the SEC has not judged the accuracy or adequacy of the prospectus The SEC requires that the disclaimer be included in the prospectus The prospectus may include information on the funds performance This includes gains or losses in its net asset value the value of one share It also includes information on its yields and distributions of capital gains With this information you can compare the fund to others like it The prospectus also discusses the risks involved in the types of securities in which it invests Each security involved has its own discussion There is a short explanation of the distribution of dividends and capital gains It explains how often they are paid out The section on taxes explains how your dividends and capital gains are taxed And now some words on how to obtain a prospectus 
-1313657161:-1117876393:4|%%|The Fund''s Management|%%|Introduction to Mutual Fund Prospectuses|%%| THE FUNDS MANAGEMENT The chapter of a mutual fund prospectus that describes the funds management includes the board of directors the advisor the portfolio managers the transfer agent and the distributor The role of the board of directors is stated briefly • The advisor makes investment decisions The advisor section spells out in detail what the advisor does It also provides the advisors mailing address and the name of the controlling shareholder of the advisor • The prospectus describes the portfolio managers Each manager is briefly profiled with his or her educational and work history Some managers manage more than one fund • The transfer agent who disburses dividends is identified In many funds the transfer agent is also the advisor This part of the management chapter also describes how the transfer agent is compensated for its services • The distributor who distributes shares to investors is identified In some funds the distributor is related to the advisor Next we will discuss one of the bigger concerns that investors have—fees and expenses—and where to find them mentioned in the prospectus 
-1313657161:-1117876393:5|%%|The Fund''s Expenses|%%|Introduction to Mutual Fund Prospectuses|%%| THE FUNDS EXPENSES The expenses appear in their own section of the prospectus The transaction fees are listed in a table and include any or all of the following sales load sales load on reinvested dividends deferred sales load redemption fees and exchange fees Transaction fees cover the buying selling and trading of shares The operating expenses are listed in a table of their own Operating expenses include management fees 12b1 fees which cover marketing costs and various other expenses These are the fees that pay those who manage and maintain the fund Many prospectuses provide hypothetical illustrations of the operating expenses Here is an example of an operating expense table Fund Management Fee 12b1 Fees Other Expenses Total Operating Expenses XYZ 062 None 028 090 As an investor you have an entire section devoted just to you Well discuss the shareholder manual next 
-1313657161:-1117876393:6|%%|Shareholder Manual|%%|Introduction to Mutual Fund Prospectuses|%%| SHAREHOLDER MANUAL The shareholder manual is a large section that covers the howtos of buying and selling mutual fund shares It is one of the easiesttoread sections in the prospectus The shareholder manual explains how to open an account and how to add to an existing account For example you have the option of sending checks calling by phone or any of several other possibilities It also covers how to sell shares Most of the methods available for selling shares are the same as those for buying shares The manual also covers shareholder services including these • Information services and the numbers to call • Various investment plans and how to set them up • Transaction services • Information on special situations such as when you are investing for a corporation • How the price of a share is determined Some lesserknown parts of the prospectus will be introduced next 
162443197:-890297264:3|%%|Keoghs vs. SEP-IRAs|%%|Keogh Plans|%%| KEOGHS VS SEPIRAS The main reason you might choose to place your money into a Keogh instead of a SIMPLE or simplified employee pension plan SEPIRA is the amount you can save in each plan The amount you can contribute to a SIMPLE or SEPIRA is much less than that for a Keogh Like all IRAs a Keogh lets you grow your savings free of current taxes As with a SIMPLE or SEPIRA you must open your Keogh fund before December 31 of the plan year to qualify for tax deductions In both accounts contributions can be made any time until April 15 of the following year However setting up a Keogh can be much more complex than setting up a SIMPLE or SEPIRA Neither a Keogh nor SEP plan may lend any part of the fund to an owner or employee Nor may it buy or sell property from another owner or employee who is in the plan The other major difference is that Keogh plans are more flexible than SIMPLEs or SEPIRAs SIMPLEs and SEPs can be set up only as defined contribution plans whereas a Keogh can also be set up as a defined benefit plan In general Keoghs are used more often than SIMPLEs and SEPs by highincome business owners Now lets take a look at the possible tax benefits you can receive by opening up a Keogh fund 
162443197:-890297264:2|%%|Types of Keogh Plans|%%|Keogh Plans|%%| TYPES OF KEOGH PLANS A Keogh plan is a retirement plan for the selfemployed or for employees of unincorporated mostly small businesses Money you place into a Keogh grows taxfree until it is withdrawn Fulltime employees must be included in a Keogh plan if they have worked for the company more than three years You cannot take money out of your Keogh without a potential tax penalty before you turn 59 and separate from service A defined benefit Keogh lets you choose the specific amount you will receive from the fund at retirement To reach this amount in time a percentage of your yearly earnings based on an actuarial formula goes into the account each year The formula uses your age life expectancy estimated retirement benefit amount and years to retirement to come up with the amount that goes into the fund each year A defined benefit plan allows a greater current income tax break for older employees and employers because larger contributions are required to fund a specified future benefit with fewer years to retirement In a defined contribution Keogh plan the amount of your retirement benefit depends on the amount of your annual contributions and the growth rate The most you can place into your account each year is 40000 or 100 percent of your annual net income up to your first 200000 whichever is smaller Employees receive the same percentage in their individual accounts as you put in yours There are two types of defined contribution plans If contributions to the plan are based on profits the plan is called a profit sharing plan If the plan puts money away based on a percentage of pay it is known as a money purchase plan The money purchase Keogh may be better for those who begin saving for retirement early in life With a money purchase plan the employer must contribute the same percentage of wages to the plan each year whether or not the company makes a profit The percentage employers contribute under a profit sharing plan can change each year and there is no mandatory contribution amount Now that you understand the 
162443197:-890297264:6|%%|Responsibilities to Employees|%%|Keogh Plans|%%| RESPONSIBILITIES TO EMPLOYEES If you own an unincorporated business that has employees you must set up Keogh plans for your eligible employees as well as for yourself A Keogh plan can set eligibility requirements but the requirements cannot discriminate in favor of highly compensated employees The plan can have a minimum age requirement not to exceed 21 length of service requirement fulltimeparttime requirement more than 1000 hours and vesting schedule Ineligible employees may be excluded from the plan For example a hypothetical plan may require that eligible employees Be fulltime employees 1000 hours or more per year Be at least 21 years old Have worked for at least one year Vesting for eligible employees can follow either of two schedules The graded schedule vests 20 percent of benefits for each year of service beginning with the third year with 100 percent of benefits vested after seven years With the cliff schedule there is no vesting at all until after 5 years of service at that time the benefit becomes 100 percent vested Contributions to Keoghs must be in cash but can be invested in a wide variety of ways including bank accounts stocks and bonds mutual funds and annuities The assets of Keogh plans are held in a trust for the beneficiaries employees If an employee leaves the company he or she can roll over the vested benefits to an IRA Now lets put all you have learned about Keoghs together 
162443197:-890297264:5|%%|Who Is Eligible for a Keogh?|%%|Keogh Plans|%%| WHO IS ELIGIBLE FOR A KEOGH? Keogh plans are designed for sole proprietors and partners and their employees Chances are if you file a Schedule C or E for your tax returns you are eligible for a Keogh If you own a business or if you are a partner of a business that is not incorporated you can open a Keogh Its not enough to just be an owner however you must also perform personal services for the company If you are a limited or retired partner in a business a Keogh is not available to you If you own more than one unincorporated business you must open a Keogh for each business You cannot have a Keogh plan in one business but not the other If you have a regular job but you also earn selfemployed income you can still save through a Keogh plan Selfemployed ministers consultants or salespeople who work for outside vendors are examples of professionals who could open Keoghs Salaried persons who work for corporations however would not be eligible unless they received income from selfemployment The amount you can contribute to a Keogh depends on your earned income Your selfemployed earned income is based on your gross income minus any deductions you file on your income taxes Now lets take a closer look at the employers responsibilities to employees under a Keogh plan 
162443197:-890297264:1|%%|Introductory Page to Keogh Accounts|%%|Keogh Plans|%%| KEOGH PLANS You know its wise to begin saving for your retirement as soon as possible But with so many different retirement accounts to choose from where do you begin? If you are selfemployed or work for an unincorporated business one option to consider is the Keogh plan This tutorial will explain the benefits of Keogh plans as well as help you to understand the several different types of Keogh plans available to you You will learn about the following Keogh topics Lets begin with the basics 
162443197:-890297264:7|%%|If You Are Self-Employed, You May Be Eligible for a Keogh|%%|Keogh Plans|%%| IF YOU ARE SELFEMPLOYED YOU MAY BE ELIGIBLE FOR A KEOGH A Keogh plan allows you to do many things It allows you to save larger sums of money than you can under SEPIRA and SIMPLE retirement plans while giving you some nice tax deductions It also gives you control over your investment assets However if your selfemployed business uses other employees you will have to include them in your Keogh plan which could prove costly To make the best decision as to how to invest for retirement be sure to check out the other tutorials on IRAs 401k plans and pensions For more information about taxdeferred investing be sure to see our other tutorials in this series 
162443197:-890297264:4|%%|Keoghs and Taxes|%%|Keogh Plans|%%| KEOGHS AND TAXES You may defer income taxes on any money you put into a Keogh plan The interest dividends and capital gains you earn on your Keogh money also grow taxdeferred You will pay taxes on your Keogh money when you withdraw it You must begin withdrawing funds from your Keogh by April 1 of the year after you turn age 70 The amount you are taxed depends on how you withdraw your money Funds taken out are taxed at regular income tax rates If you choose to take your Keogh money in one lump payment you may be eligible for income averaging Contributions to a Keogh are made pretax which reduces your taxable income If you are the owner of a selfemployed business you can deduct the entire amount of your yearly Keogh contribution including contributions made on your employees behalf If you are a partner in a selfemployed business you can deduct the amount contributed by the partnership on the partners behalf Before you enjoy the tax benefits of your Keogh plan you must first make sure that you are eligible to open up a Keogh 
162443197:-798405835:1|%%|Introductory Page to IRA Deductions|%%|IRA Deductions|%%| IRA DEDUCTIONS If you want to pay less income tax you may be interested in a traditional individual retirement account IRA Besides providing your retirement nest egg the contributions you make may be taxdeductible The rules can be complex though This tutorial will explain the rules for determining how much of your contributions you can deduct from your taxes After you have read it you should have a better understanding of your own deduction privileges Here is what we will discuss Well begin with some background on the traditional IRA 
162443197:-798405835:3|%%|What Are the Tax Advantages of a Traditional IRA?|%%|IRA Deductions|%%| WHAT ARE THE TAX ADVANTAGES OF A TRADITIONAL IRA? In many cases the contributions you make to a traditional IRA can be deducted from your taxable income This is one of the popular attractions of these retirement accounts When you deduct you subtract your contributions from your taxable income for the year you made them For instance let us say you earned 23000 this year Let us also say that you contributed 2000 to your traditional IRA You can deduct that amount leaving you with 21000 on which to be taxed There is however an income limit after which you cannot deduct the full amount If you find that you do not qualify for deductibility you can still contribute to a traditional IRA In this case yours would be a nondeductible IRA Alternatively you may be able to contribute to a Roth IRA Since your contributions are not deductible for either plan the Roths other advantages may make it a better choice If you are married and you or your spouse is not working or has earned only a minimal income either of you may set up what is called a spousal IRA As long as one spouse has earned income at least equal to the total amount you contribute for both spouses each of you may set up an IRA For 2001 a maximum of 2000 may be contributed to each account The traditional IRA contribution limit has been increased to 3000 per person per year from 2002 through 2004 The law also allows each taxpayer age 50 and older to make an additional catchup contribution of 500 for each of those years By 2008 the regular IRA contribution limit will reach reach 5000 per year with an extra 1000peryear catchup for those over 50 In a traditional IRA any dividends and capital appreciation that accrue to your account are taxdeferred That means that the government cannot tax them until you withdraw them For instance if your IRA earns 100000 over the years that 100000 will not be taxed until you withdraw it There are limits on deductibility and they may affect you We will cover them next 
162443197:-798405835:5|%%|Deductibility for Married Filers|%%|IRA Deductions|%%| DEDUCTIBILITY FOR MARRIED FILERS If you are married filing jointly and both you and your spouse are covered by an employer plan your deductibility also begins to decline at a certain phaseout point Deductibility drops by 10 for every 50 of income that is above this point The deductibility of your contributions will drop to zero once your AGI reaches 10000 over your phaseout point Here is the table of phaseout points which will rise until 2007 There are rules that apply when only one spouse is covered by another plan The covered spouse may deduct his or her contributions but deductibility begins dropping once the joint AGI reaches 52000 It declines by 10 for every additional 50 of AGI The noncovered spouse has full deductibility up to 150000 of joint AGI This will decline by 10 for every additional 50 of AGI At 160000 deductibility drops to zero Is a traditional IRA for you? You can use your knowledge of tax deductibility to help you decide 
162443197:-798405835:2|%%|What Is a Traditional IRA?|%%|IRA Deductions|%%| WHAT IS A TRADITIONAL IRA? Before we look at deductions more closely lets identify the traditional IRA It may help to distinguish it from the Roth IRA The differences lie in deductibility and taxability For the sake of clarity remember that all IRAs have two components the contributions you make to them and the earnings that grow on them The traditional IRA has these characteristics Contributions you make may be taxdeductible If your contributions are deductible you will be taxed on them when you make withdrawals The dividends and capital gains that build on your contributions will not be taxed until you make withdrawals The Roth IRA has these characteristics Contributions you make are never taxdeductible You will not be taxed on your contributions when you withdraw them The dividends and capital gains that build on your contributions will not be taxed at all if you begin making withdrawals after age 59 and you have waited at least five years to do so The largest contribution allowable to either plan for 2001 is the smaller of 2000 or 100 percent of earned income from employment Individuals must have earned income in order to contribute to IRAs A tax law change in 2001 increased the IRA contribution limits in stages For 2002 through 2004 the contribution limit will be 3000 and this will increase to 4000 for 2005 through 2007 For 2008 and beyond the IRA contribution limit will reach 5000 One must not exceed the maximum contribution amount for all traditional and Roth IRA accounts combined The law also allows taxpayers age 50 and above to make an extra catchup contribution of 500 each year from 2002 through 2005 For 2006 and later the catchup contribution will increase to 1000 So for example when the regular contribution limit reaches its 5000 peak in 2008 the over50 taxpayer is scheduled to have a 6000 annual IRA contribution limit Investors who want to use an IRA to reduce their taxes may find the traditional IRA suitable for them 
162443197:-798405835:6|%%|Should You Have a Traditional IRA?|%%|IRA Deductions|%%| SHOULD YOU HAVE A TRADITIONAL IRA? Now you know the advantage of IRA deductibility You should also be able to calculate how much of your IRA contributions are taxdeductible This information will come in handy if you decide to set up your own IRA or if you want to change your deductibility option If you are currently in a high tax bracket but foresee being in a lower one after you retire you can benefit greatly from a traditional IRA because your withdrawals will be taxed at your current rate Many retirees fall to a lower tax bracket after they stop working and this can save them on taxes To understand individual retirement accounts in more detail please read the appropriate tutorials There are also tutorials on Roth and education IRAs In addition you can read about how distributions from IRAs can be taken 
162443197:-798405835:4|%%|Who May Make Deductible IRA Contributions?|%%|IRA Deductions|%%| WHO MAY MAKE DEDUCTIBLE CONTRIBUTIONS? Your contributions are fully deductible if you are single and not covered by another employer plan If you are married and neither you nor your spouse is covered by another employer plan contributions are also fully deductible Since 1987 contributions to an IRA have not been fully deductible if the individual participates in an employersponsored retirement plan Individuals who are covered by such a plan must use their adjusted gross income AGI on their tax forms to determine how much may be deducted The maximum allowable deductible contribution drops by 10 for every 50 of income that is above a certain limit called a phaseout point Once your AGI reaches 10000 over the phaseout point your deduction drops to zero The phaseout point will rise from now until 2005 where it will remain at least until changed by law Here is the table of phaseout points Tax Year AGI For Single Filers 2000 32000 2001 33000 2002 34000 2003 40000 2004 45000 2005 and after 50000 Single filers not covered by another qualified plan or married couples in which neither partner is covered by another plan may deduct the full amount of their contributions On the next screen we discuss the limits that apply to married couples 
-1313657161:-666421824:6|%%|Keeping Track of Your Funds|%%|Monitoring Mutual Funds|%%| KEEPING TRACK OF YOUR FUNDS This tutorial has given you the tools you need to monitor mutual funds You should be able to understand newspaper listings of mutual fund ratings and understand how to calculate total return and yield For more about mutual funds in general visit the other tutorials on mutual funds 
-1313657161:-666421824:5|%%|Performance Measurements|%%|Monitoring Mutual Funds|%%| PERFORMANCE MEASUREMENTS The greater the risk of a mutual fund the greater the possible return But what if you want to compare funds on both risk and return? Just looking at a funds risk or a funds return separately wont give you a total picture of how well a fund is doing Luckily we have some tools to look at that combine both elements They measure performance that is adjusted for risk In our first section on monitoring mutual funds we looked at beta Beta shows you how volatile a fund is relative to the entire market it is a measure of risk If a fund has a beta of 11 and the overall market goes up 20 percent you could expect the fund go up 22 percent 11 x 20 Alpha is a measure of an investments riskadjusted performance Alpha compares the funds performance to its risk using beta If a funds alpha is positive it returned more than was predicted by its beta Alpha is a way of looking at a funds performance that includes both return and risk It is possible that two funds with the same returns might have different alphas The higher a funds risk the higher the returns it needs to produce a positive alpha When comparing alphas of two funds having the same beta the fund with the higher alpha is more efficient It provides more return for the same amount of risk Alpha is also referred to as value added because positive alphas let you know you have betterthanexpected riskadjusted returns Another way of evaluating a fund using both return and risk is the Sharpe ratio a formula that compares the funds performance to its risk using standard deviation In simple terms standard deviation is a measure of risk that tells us how much a funds return for each of a number of shorter periods generally varies from the funds annual rate of return over a longer period A high Sharpe ratio indicates that a fund is very efficient at producing higher returns for the amount of historic risk In order to know how well your particular fund is doing you will need to compare its Sharpe ratio with those of other funds Lets conclude this tutorial 
-1313657161:-666421824:3|%%|Reading Newspaper Listings|%%|Monitoring Mutual Funds|%%| READING NEWSPAPER LISTINGS Each day in the newspaper mutual funds report their net asset values NAV The NAV of a fund is the value of the securities in the fund minus its liabilities divided by the number of shares held by shareholders To find the value of your portfolio look at the column marked NAV and multiply the number of shares you own by the NAV number You would have received that amount if you had redeemed your shares that day Youll also see another column marked offer price this is the public offering price POP Offer price is simply the amount you would have had to pay if you wanted to buy shares of the fund that day Any difference between the offer price and NAV is due to a frontend sales charge to purchase shares Next to the offer price column you will see either a plus or minus sign This shows you whether the funds net asset value has gone up or done since the close of the previous trading day The change column shows you how much of a change there was Other symbols you might encounter include letters after the fund name An r indicates a fee for redeeming shares of this fund An f after a fund name means the funds most recent numbers are not available and the number you see represents the prior days NAV Usually a key is provided for the various letter codes To find out more about how your funds are performing you need to understand yield and total return 
-1313657161:-666421824:4|%%|Total Return and Yield|%%|Monitoring Mutual Funds|%%| TOTAL RETURN AND YIELD Returns on the money you invest in a mutual fund are not guaranteed The value of a fund changes on a daily basis A funds performance is an historical account of its past results Remember that past performance is no guarantee of future results Total return tells you how much a fund has gained or lost based on the amount invested including any distributions It is not generally used to evaluate overall fund performance but can be used to show you your straight returns To figure your total return multiply the number of shares you own by the net asset value add all distributions and then subtract the money you invested including reinvested distributions into the fund For example suppose you invested 1000 into XYZ Fund and purchased 100 shares It paid you 200 in dividends of which you reinvested 100 to buy 10 more shares You see that the NAV is now 9 per share Your total return is The most common tool for measuring a funds past performance is average annual total return This is the percentage of change in a funds net asset value plus all distributions over time Average annual total return is most often calculated for one five and tenyear periods It assumes that all distributions are reinvested back into the fund It is equivalent to the compounded return one would have had to get on an interestbearing investment to achieve the same result Yield is the amount of income you earn on a fund A funds yield is calculated by dividing the amount of income you earn on a fund by the price you paid for it For example if you invested 1000 into a mutual fund and earned 100 in dividends the yield on your mutual fund would be 10 percent The current yield is the total of dividends from the last twelve months expressed as a percentage of current share price To get an even better sense of how your fund is performing you can combine the elements of fund risk and reward Lets see how in the next tutorial section 
-1313657161:-666421824:1|%%|Introductory Page to Monitoring Mutual Funds|%%|Monitoring Mutual Funds|%%| MONITORING MUTUAL FUNDS Investing your money in mutual funds can be a great comfort After all someone else is now managing your investments This saves you time and the headache of sorting through all those complex stock tables you see in the business section of your local paper each week But before you get ready to cash in your profits you need to make sure youre watching the results of your funds carefully enough to decide whether youve made the right investment decisions In this tutorial on monitoring mutual funds we will look at these topics Lets begin by looking at how risk is measured 
-1313657161:-666421824:2|%%|Measurements of Risk|%%|Monitoring Mutual Funds|%%| MEASUREMENTS OF RISK How do you know how risky a mutual fund is to invest in? Mutual funds make it easy for you to decide by giving you several risk measurements to look at Some measures may be found in a funds prospectus However one can find mutual fund statistics in the financial press or from commercial investment information services such as ValueLine or Morningstar A good way to judge how a fund is doing is to compare it to the rest of the overall market One such measure of a funds sensitivity to market performance is called beta It measures the value changes of the fund against the ups and downs of the market The market is said to have a beta of 1 If the beta of a mutual fund is also 1 you can be pretty sure the behavior of the fund will follow along with the direction of the whole market A beta higher than 1 means the fund is more volatile than the market A fund with a beta of 120 is 20 percent more volatile than the market A second way to measure the risk of your fund is by looking at R2Rsquared The R2 statistic compares how two investments vary with one another In the case of a mutual fund R2 measures how much of a funds past performance could have been predicted by the returns of the overall market If R2 is 1 its performance has followed that of the market almost exactly An R2of 0 on the other hand means the performance of the fund is not related to the performance of the overall market A funds turnover rate lets you know how often the fund buys and sells securities in its portfolio A turnover rate of 50 percent for example tells you the fund sold and reinvested securities valued at half of the funds entire worth during the year Mutual funds that are aggressively managed tend to have high turnover rates The last thing to keep in mind when you look at risk is the financial strength of the companies in the fund Emerging growth companies with lower yields will be more unstable than mature companies None of these statistics should be viewed alone One should view the statistics in relationship to each other
162443197:-639515464:2|%%|What Is a Retirement Plan?|%%|Retirement Withdrawals|%%| WHAT IS A RETIREMENT PLAN? When we talk about retirement planning we dont mean daydreaming about all that leisure time A retirement plan is an investment instrument that helps you accumulate money that can provide you an income in retirement Most retirement plans are authorized by the Internal Revenue Code For example 401k plans Keoghs individual retirement accounts IRAs and other plans enable you your employer or both to contribute to various investments for your retirement Although many types of plans exist—each with its own special features advantages and disadvantages—these plans share a number of common attributes For instance most retirement plans offer taxdeferred earnings You do not pay taxes on the earnings until you withdraw funds from your account Many plans also enable you to contribute pretax dollars to these investments This enables you to lower your current income for tax purposes and defer taxes until you withdraw funds when you retire and may be in a lower tax bracket Yet because of the variety of plans—and the variety of reasons for withdrawing money from them—people sometimes have questions about when how and how much they can take from their plans This tutorial will address a number of the most frequently asked questions about withdrawing money from retirement plans Taxes are a formidable issue in retirement plan withdrawals or distributions Well begin to examine this issue in the next article 
162443197:-639515464:5|%%|When Must You Start Taking Retirement Plan Distributions?|%%|Retirement Withdrawals|%%| WHEN MUST YOU START TAKING RETIREMENT PLAN DISTRIBUTIONS? You can take out any amount at any time from your retirement plan without facing an early withdrawal penalty once you have reached age 59½ but you must begin withdrawing minimum annual amounts from your plan once you reach age 70½ If you fail to take out the required minimums you may face a 50 percent excess accumulation tax The Internal Revenue Service imposes the tax on any part of the annual minimum distribution that you fail to take If you are still working at age 70½ however you can delay beginning your required minimum distributions until you retire—with two exceptions If you own at least 5 percent of the company or if your plan is an IRA you must begin making regular distributions even if you are still working Your required beginning date is the deadline to begin taking distributions from your plan If your plan is an employer plan you have two possibilities Your deadline is April 1 of the year following the later of either • The year you attain age 70½ • The year you retire For example if you retired at age 68 and reach age 70½ any time during the year 2002 your required beginning date would be April 1 2003 Beginning the second year after you turn 70½ or after your beginning date if its later you must take your required distribution during the calendar year—in other words from January 1 through December 31 You cannot wait until April 1 of the following year to take the distribution There also are a few other special rules For example people participating in a government or church plan also may be able to delay their required beginning date If you have specific questions in this area you will want to check with your plan or tax advisor You also need to carefully consider the timing of your first years payments in light of possible tax consequences down the road What does this mean? Consider the following example Eleanor turned age 70½ in 1999 and delayed taking her first required distribution until March 2000 That same year her second year after tur
162443197:-639515464:8|%%|Retirement Withdrawals Come With Strings Attached|%%|Retirement Withdrawals|%%| RETIREMENT WITHDRAWALS COME WITH STRINGS ATTACHED In return for the tax breaks available for retirement plans the Internal Revenue Code has a plethora of rules and regulations that determine when and how much you are allowed to take from your plan In addition how you time your distributions can have a considerable impact on how much you are taxed This is a complex topic and one you may want to review periodically as you either approach retirement or move beyond that milestone You also may want to explore other tutorials on related retirement topics 
162443197:-639515464:3|%%|What Are the Tax Implications of Retirement Plan Distributions?|%%|Retirement Withdrawals|%%| WHAT ARE THE TAX IMPLICATIONS OF RETIREMENT PLAN DISTRIBUTIONS? Maybe youve dutifully scrimped for a number of years putting aside savings into one or more retirement plans Maybe youve even saved a little to meet your longterm financial goals While saving money is undoubtedly the most important step in retirement planning it surely is not the only one Tax planning also ranks as an important consideration For instance you often can defer taxes on the money you contribute to your retirement plans You can make a pretax contribution to your plan and deduct the contribution from your taxable income on your tax return Then when you are older and working less or not at all you can withdraw regular amounts from your plan and pay tax on the income at a lower rate On the other hand if you contribute aftertax money to your retirement plan you develop a basis in the account This basis cannot be taxed again as you withdraw it from your plan To take best advantage of the tax rules you usually should make as many taxdeductible contributions as possible before making any nondeductible contributions of aftertax income Clearly timing is a crucial tax issue The same retirement plans that can help you accrue your nest egg during your primary working years are also designed to encourage you to use that nest egg during your retirement years The tax code aims both to hinder you from taking out your money before retirement and also from saving your money to pass it to your heirs If you take money out of your plan before retirement or if you fail to take money out of your plan after you have reached your required retirement age you will face certain tax penalties Well learn more about the agerelated withdrawal penalties in the next article 
162443197:-639515464:7|%%|What Are Annuity Distribution Methods?|%%|Retirement Withdrawals|%%| WHAT ARE ANNUITY DISTRIBUTION METHODS? There are four annuity distribution methods • A single life annuity makes payments to you for the remainder of your lifetime • A joint life annuity makes payments to you and your beneficiary for the remainder of your lifetime or the lifetime of your beneficiary—whichever is longer • A term certain annuity makes payments for a specific number of years • A life annuity with term certain makes payments to you for the remainder of your lifetime or if you die before a specific term such as ten years payments continue to your heirs until the end of the term To determine your required annual minimum distribution you may simply divide your retirement account balance by a single or joint life expectancy factor You can use a life expectancy table such as those found in IRS Publication 590 For example here is a small segment of an IRS life expectancy table Attained Age Single Life Expectancy in years 66 192 67 184 68 176 69 168 70 160 You may choose to recalculate your required minimum distribution annually If you recalculate each years required minimum distribution will be based on your life expectancy that year If you choose not to recalculate this figure annually you simply subtract 1 from your life expectancy every year following the first year you begin receiving distributions Recalculation generally lowers your payments because when you live another year your life expectancy increases You also may determine your required minimum distribution through amortization which is another way to liquidate your assets through periodic payments containing both interest and principal This is also the method you may have used to pay off a home mortgage loan Amortization involves choosing a reasonable interest rate—often in the 5 to 10 percent range—and prorating the account balance across a fixed period using this rate and life expectancy tables You can do the computation using the financial calculator built into many spreadsheet programs or available at various financial Web sites Understand
162443197:-639515464:4|%%|When Can You Take Distributions From a Retirement Plan?|%%|Retirement Withdrawals|%%| WHEN CAN YOU TAKE DISTRIBUTIONS FROM A RETIREMENT PLAN? When exactly can you take distributions from your retirement plan without incurring tax penalties? You can make penaltyfree distributions from your retirement plan after you are of age 59½ Of course you still must pay regular income tax due on any withdrawals except for the Roth IRA And some employer retirement plans do not allow you to take out any funds until you retire from the company Before age 59½ you may have to pay a tax penalty on early withdrawals in addition to the regular taxes you owe on these distributions The tax penalty equals 10 percent of the amount withdrawn However the early withdrawal tax does not apply if you take out funds and roll them over or directly transfer them to another retirement plan or if you meet certain requirements for exceptions to premature withdrawal rules At some point during your career you may face a financial need and decide to meet it by taking money from your retirement plan Check first with your employer or plan provider some employer retirement plans enable you to receive a loan from your plan Some retirement plans have exceptions to the rules regarding the early withdrawal penalty Check to see whether you meet any of the allowable exceptions to the early withdrawal tax • Dividends from employee stock ownership plans ESOPs—these are never subject to the early withdrawal tax regardless of your age • Substantially equal payments—you receive equal payments from the plan over your expected lifetime or the expected lifetime of you or you and your spouse • Medical expenses—certain medical expenses are exempt from the early withdrawal tax if they exceed 75 percent of your adjusted gross income • Education expenses—these include tuition and other specific higher education expenses for yourself your spouse children or grandchildren • Firsttime home purchase—again the home can be purchased by you your spouse or certain other family members • Plan payments from a former employer—this exception applies only if you are at 
162443197:-639515464:1|%%|Introductory Page to Retirement Withdrawals|%%|Retirement Withdrawals|%%| RETIREMENT WITHDRAWALS Of course the goal in carefully planning and contributing to retirement plans is to someday take out your money as well as the earnings that have grown in the taxsheltered account People generally withdraw funds from their retirement plans after they retire when they often are in a lower tax bracket Sometimes however people face unplanned financial needs such as a job loss or divorce and need to take a distribution from their plan before retirement How to handle these and other types of distributions is the subject of this tutorial To begin our discussion lets review the basic features of retirement plans 
-1313657161:-494996818:1|%%|Introductory Page to Load and No-Load Funds|%%|Load and No-Load Funds|%%| LOAD AND NOLOAD FUNDS To load or not to load? In mutual fund investing that is often the question Many investors choose funds that dont charge loads Others like what they can get in return for paying loads In this tutorial we will cover the basics of loads You will learn what a load is and what you can get from load funds We will cover the following topics To begin let us look at what a load is 
-1313657161:-494996818:4|%%|Other Fees Charged by No-Load Funds|%%|Load and No-Load Funds|%%| OTHER FEES CHARGED BY NOLOAD FUNDS Noload does not mean no fee Noload funds may charge fees other than sales charges Some of these fees make up for the lack of sales charges Below are some of the other fees a noload fund may charge • Maintenance fee—This fee covers the costs of maintaining accounts It covers dividend statements and periodic reports among other things Most maintenance fees are 10 per year • Transaction fee—This fee covers the costs of investing the money in securities for the fund • Management fee—This fee is charged to compensate those who run the funds portfolio It rarely exceeds one percent of the funds assets • 12b1 fees—These fees cover marketing advertising and distribution costs They are called hidden loads by many because they cover some costs that sales loads normally cover • Redemption fee—This is a charge imposed when investors sell shares back to the fund Other names for these charges are backend loads exit fees and deferred sales loads True noload funds do not charge redemption fees because these fees are technically sales loads Before you choose a fund based on sales charges you should know what each one offers you On the next page we will discuss that 
-1313657161:-494996818:5|%%|Benefits of Load and No-Load Funds|%%|Load and No-Load Funds|%%| BENEFITS OF LOAD AND NOLOAD FUNDS Load funds are usually sold through brokers or other commissioned advisors These advisors must evaluate their customers needs and make suitable recommendations They do not charge a separate fee for advice they give They are compensated by commissions from the mutual fund companies they represent These advisors also provide ongoing advice and recommendations relating to their customers investments Very often they prevent their customers from panicking when things look bad They also advise their customers of the optimum mix of investments that would best meet their short intermediate and longterm goals A broker or advisor can help you to clarify your objectives He or she can help you figure out your risk tolerance An advisor can help you find funds with good performance histories Since advisors have more access to research than does the average investor some investors find their services worth the price In addition load funds make up a large part of the mutual fund family and those who buy them can find some very good investment opportunities The most obvious benefit of noload funds is that they leave you with more to invest Investors who understand what they want in a fund and who are willing to manage their investments on their own frequently choose noload funds These investors must do their own research and often subscribe to investment advisory services and pay separate fees for advice However there is no evidence that noload funds perform better or worse than load funds