publicly-traded fund

A fund with a fixed number of shares outstanding, and one which does not redeemshares the way a typical mutual fund does. Publiclytraded funds behave more like stockthan open-end funds: closed-end funds issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on astock exchange, and they are not obligated to issue new shares or redeem outstanding shares as open-end funds are. The price of a share in a publicly-traded fund is determined entirely by market demand, so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). also called closed-end investment company or closed-end fund

6 "Facts" About the Stock Market

by Roger Wohlner

To help you determine a reasonable rate of return toexpect on your stock investments, it might be helpful toreview some "facts" about the stock market: - The stock market's historical return can changedramatically depending on the period considered. - The market tends to revert to a mean. - History may not be a good predictor of future returns. - The pattern of actual returns affects your investmentbalance. - Historical returns do not include several items that investors must deal with. - Investors have a difficult time earning historical returns. These facts are only supplementary facts and have not yet taken into consideration the risk you are willing to incur. For that reason, it will be up to you as an individual investor to consider how much risk you would be willing totake on in your investments.
Source(s): www.investorguide.com

Investing is most intelligent when it is most businesslike. - Ben Graham

shares outstanding
Definition
The shares of a corporation's stock that have been issued and are in the hands of the public. also called outstanding stock.

Initial Public Offering Definition

IPO. The first sale of stock by a company to the public. The most common reason for a company to initiate an IPO is inorder to raise more capital. One of the most difficult parts of an IPO is to determine the proper price to initially offer the new stock; too high and investors won't be interested, but too low and the company is sacrificing the amount of moneythat might have been made if they priced it higher. There is generally a significant amount of risk in an IPO, because the company going public is frequently small or relatively unknown, and hasn't had a chance to prove itself to the public; as such, they also have the capacity for significantpayoffs.

regional exchange
An SEC-registered stock exchange which focuses on listing stocks of corporations in its geographic region. The major U.S. regional exchanges are the Boston, Chicago, Cincinnati, Pacific, and Philadelphia stock exchanges. Regional exchanges are usually significantly smaller than exchanges that focus on listing stocks at the national level. Many stocks listed on regional exchanges are not listed on national exchanges.

However, regional exchanges also feature stocks which list both on the regional and the nationalexchange.

Investors in the corporate bond market do not enjoy the same access to information as a car buyer or, dare I say, a fruit buyer. SEC Chairman Arthur Levitt

When You May Be Ready to Invest

by InvestorGuide Staff

If you've transitioned from a debt situation to a paycheck-topaycheck situation to a saving some money everymonth situation, you're ready to begin investing what you save. You should start by amassing enough to cover three to six months of expenses, and keep this money in a verysafe investment like a money market account, so you're prepared in the event of an emergency. Once you've saved up this emergency reserve, you can progress to higher risk(and higher return) investments: bonds for money that you expect to need in the next few years, and stocks orstock mutual funds for the rest. Use dollar cost averaging, by investing about the same amount each month. This is always a good idea, but even more so with the dramatic fluctuations in the market in the past 10 years. Dollar cost averaging will make it easier to stomach the inevitable dips.
Source

Common Stock Strategies - Part 1

InvestorGuide University > Subject: Investing > Topic: Investing Strategies > Common Stock Strategies - Part 1 by InvestorGuide Staff (Write for us!) Buy and Hold

The "buy and hold" approach to investing in stocks rests upon the assumption that in the long

term (over the course of, say, 10 or more years) stock prices will go up, but the average investor doesn't know what will happen tomorrow. Historical data from the past 50 years supports this claim. The logic behind the idea is that in a capitalist society the economy will keep expanding, so profits will keep growing and both stock prices and stock dividends will increase as a result. There may be short term fluctuations, due to business cycles or rising inflation, but in the long term these will be smoothed out and the market as a whole will rise. Two additional benefits to the buy and hold strategy are that trading commissions can be reduced and taxes can be reduced or deferred by buying and selling less often and holding longer. Some proponents of the buy and hold strategy of investing often believe in the Efficient Market Hypothesis or the Random Walk Theory .

Market Timing

Market timing is essentially the opposite of buying and holding. Market timers believe that it is possible to predict when the market, or certain stocks, will rise and fall. It therefore makes sense to buy when the markets are low and to sell when they are high in order to maximize profits. Market timers can use any number of different methods for timing the market - technical analysis, fundamental analysis, or even intuition .

Most experts agree that market timing is incredibly difficult if not downright impossible. They also warn against it because:

It's hard to say when the market or a particular stock is "high" or "low"; often a seemingly high stock will go higher, and a seemingly low stock will go lower.

Commissions eat away at your profits when you trade frequently, especially on small transactions.

The bid/ask spread also eats away at your profits, especially for thinly traded stocks. In the long run, the market goes up. Unless you're a superb timer, you'll do better staying fully invested at all times. For example, in the last 40 years, the market returned about 11.3% annually. If you were fully invested the whole time, but got out completely for the 40 best months, your annual return would've dropped to 2.7%. If you miss the big moves it hurts, and no one really knows when they're coming.

Growth Growth investors focus on one aspect of a company: its potential for earnings growth. They believe that companies with high earnings growth will see their stock price continue to increase, since investors will want to own profitable companies that can pay large dividends in the future. The number that they pay the most attention to is earnings per share, especially how it changes from year to year, although they sometimes look at revenue growth as well . Some investors also compare the price/earnings ratio with the annual earnings growth, to get a feel for how much the market is willing to pay for a given rate of earnings growth. Growth stocks tend to be from young companies, so they are often riskier than the average security. They have the potential fconstant dollar plan An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of whatdirection the market is moving. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought. also called constant dollar plan. also calleddollar cost averaging. or large gains, but they also have the potential for large

Be Cautious of GAAP-Based Accounting

by Warren Buffett

There are managers who actively use GAAP to deceive and defraud. They know that many investors and creditorsaccept GAAP results as gospel. So these charlatans interpret the rules "imaginatively" and record business transactions in ways that technically comply with GAAP but actually display an economic illusion to the world. As long as investors - including supposedly sophisticated institutions - place fancy valuations on reported "earnings" that march steadily upward, you can be sure that some managers and promoters will exploit GAAP to producesuch numbers, no matter what the truth may be. Over the years, Charlie Munger and I have observed many accounting-based frauds of staggering size. Few of the perpetrators have been punished; many have not even been ensured. It has been far safer to steal large sums with a pen than small sums with a gun.

Stocks and Your Portfolio

InvestorGuide University > Subject: Stocks > Topic: Stock Basics > Stocks and Your Portfolio by InvestorGuide Staff (Write for us!) The first thing you should know about stocks before adding them to your portfolio is that they carry a certain amount of risk. This is because the returns on stock are not guaranteed; not by the government, not by the company issuing the stock, and certainly not by your broker. That means that there is a chance that your actual return will be different than what you had expected. For instance, you might purchase stock under the expectation that its price will rise steadily over time and that it will pay you annual dividends. However, if the company experiences financial problems, you may not receive the price appreciation or the dividends that you expected. In fact, the company could even go out of business, in which case you could lose your entire investment. On the flip side, however, there is always the chance that the stock will outperform your expectations. It could double in price and start paying out hefty dividends, in which case you would enjoy a gain greater than what you had expected. Because there is uncertainty regarding which of the various possible outcomes will occur, you bear a certain amount of risk when purchasing the equity.

How do the risks associated with stocks affect your overall portfolio? That depends upon what other investments are in your portfolio. In general, the risks associated with investing in stocks are greater than the risks associated with investing in bonds or money markets . At the same time, however, the risks associated with investing in stocks are less than the risks associated with investing in options or futures . Of course, not all stocks pose the same level of risk: some (such as internet stocks) are much higher risk than others (such as utilities), so it's important to understand the amount of risk you would be taking on with any given investment.

In order to manage the risks associated with investing in stocks,most investors turn to a practice called diversification when building their stock portfolios. Diversification is a method of risk reduction in which investors buy multiple securities instead of just one. As a shareholder in several companies, the diversified investor knows that if one of his or her stocks happens to fail then there is always the chance that another one could gain enough to offset the loss. It's basically just a way for you to not put all your eggs in one basket, which is also the concept

underlying mutual funds . There are two ways to increase your diversification (and reduce your risk): increase the number of stocks you own or own stocks that are fundamentally different from one another. Of course, you can't totally eliminate all the risks involved in stock investing because there is still market risk, the risk that the entire market will fall. In that case, no matter how well diversified you are, your portfolio will suffer.

The other variable that will influence the amount of risk in your stock portfolio is your time horizon. Over the long, long term (several decades), history has shown time and again that stock prices outperform almost all other investments. However, in the short run stock prices often go down (about half the time, if the time period is sufficiently short). That means that if you are at a point in your life when you may need to sell your stocks in the short run (such as if you're close to retirement), then you may want to think twice about investing in stocks. There
www.SunnyProfits.com

is a definite possibility that the stocks that you buy now may be worth significantly less one or two years in the future. Most likely, however, they will be worth significantly more ten or twenty years in the future. So before you invest in stocks, you should sit down and examine both your own time horizons and those of the market in order to see whether or not you can bear the risks associated with short term stock investing.

Once you've thought about the risks associated with stock investing and figured out your plans for diversification, the next issue to consider when adding stocks to your portfolio is which stocks to add. You'll first want to take a look at your particular investing objectives. If you're looking for steady income with low risk, you may want to consider investing in income stocks . On the other hand, if you're looking for opportunities that may result in a big payoff and you're not too concerned about the risks involved, you might want to try investing in growth stocks . There are a number of different stock strategies that you can use to try to meet your goals .

Once you've decided on a strategy, the last step is to determine whether or not you should buy the stocks you want given the prices at which they are selling. In order to do this, you value the stocks you are interested in according to what you believe they are worth and then compare them to their market prices. If you think your stocks are worth more than what they are selling

for, then they are good candidates for purchase. If you think they are worth less than their price, then you might want to wait before purchasing them. The method of determining a stock's worth is called valuation, and there are many different approaches to it. Some investors look at a company's fundamentals while others look at quantitative data regarding the stock's price xits trading patterns . You'll probably want to look at both of these techniques in detail before settling upon which one you think is the best method for you to value stocks for your portfolio. You should also check out our "Choosing a Stock" section for more advice on how to select individual stocks to invest in .

It is a socialist idea that making profits is a vice; I consider the real vice is making losses. - Winston Churchill

OCC
Options Clearing Corporation. The organization that handles clearing of the options trades for the various options exchanges and regulates the listing of new options. It is regulated by the Securities and Exchange Commission, and is owned jointly by the U.S.stock exchanges that trade options (American Stock Exchange, Chicago Board Options Exchange, Pacific Exchange, and Philadelphia Stock Exchange). The fact that all listed options are cleared through OCC means that all options are free of default risk, since the OCC guarantees all option contracts. Therefore, the buyer or a seller of an option onlyfaces the credit risk of the OCC (which is minimal), not the credit risk of the counterparty. In order to manage risk, the OCC imposes margin requirements on all options brokers. The margin requirement depends on the particulars of each specific contract.\

Pros and Cons of Online Investing

by Montana Securities Department

Consider the source of any information you obtain online. Some investors use the Internet to conduct relatively simple transactions such as buying and selling stocks, bonds and mutual funds. Others use the Internet tomonitor the market, research companies, trade information with other investors and actively trade their portfolios. It can offer simple access to a wealth of reliable

information including business and financial publications, annual reports, SEC filings and securities regulators. However, not all online information is reliable. Online con artists make claims about visiting companies, inspecting mining operations and having personal conversations with company officials. Keep in mind that you may not be able to verify who is making these claims, much less whether the information is true. Also, it is extremely unlikely that genuine

What are Stock Option Plans?

InvestorGuide University > Subject: Options > Topic: Employee Stock Options > What are Stock Option Plans? by InvestorGuide Staff (Write for us!) Employee ownership has grown greatly in popularity over the last decade, and the growth is expected to continue. There are two types of arrangements through which employees can gain partial ownership of their employer's company and share in its growth: stock ownership plans and stock option plans. The two are similar but not identical, so it's worthwhile to look at each in turn.

An employee stock ownership plan (ESOP) is a tax-qualified, defined-contribution retirement plan which makes a company's employees partial owners. Contributions are made by the sponsoring employer, and can grow tax-deferred, just as with an IRA or 401(k). But unlike other retirement plans, the contributions must be invested in the company's stock. The benefits for the company include increased cash flow, tax savings, and increased productivity from highly motivated workers. The main benefit for the employees is the ability to share in the company's success. Due to the tax benefits, the administration of ESOPs is regulated, and numerous restrictions apply.

An employee stock option plan gives you the right to buy a certain number of shares of your employer's stock at a stated price (called the grant price, strike price, or exercise price) over a certain period of time (for example, ten years). Nearly all stock option plans are offered by companies which are publicly traded or which will soon go public. In many cases, the shares

"vest" over a period of several years, meaning that some fraction of the shares can be exercised in the first year, another fraction in the second year, and so on. Whenever the option's exercise price is above what the stock currently trades for, the option is "in the money". Otherwise, it is "underwater".

There are two basic types of stock options: non-qualified stock options and incentive stock options. Here are the major differences between the two.

For nonqualified stock options, you usually don't owe any taxes when the options are granted, but pay ordinary income tax on the difference between the exercise price and the current stock price value when you exercise the options. Companies can deduct this amount as a compensation expense. Any subsequent appreciation in the stock is taxed at capital gains rates when you sell the shares (which is more favorable if you hold for at least one year). They can be granted at a discount to the current stock price, and they are transferable to children and charity (provided your employer allows it).

For incentive (or "qualified") stock options (ISO's), no income tax is due when the options are granted or when they're exercised. Instead, the tax is deferred until you sell the stock, at which time you are taxed for your entire gain. As long as you sell at least two years after the options were granted and at least one year after you exercised them, you'll be taxed at the lower, longterm capital gains rate; otherwise, the sale is considered a "disqualifying disposition", and you'll be taxed as if you had held nonqualified options (the gain at exercise is taxed as ordinary income, and any subsequent appreciation is taxed as capital gains). ISO's may not be granted at a discount to the current stock price, and they are not transferable, except through a will.

There are three basic ways to exercise your options:

Pay cash: This is the simplest technique. Stock swap: Some employers let you trade company stock that you already own to acquire option stock. Since the exercise price is below the stock price, you will get more shares than you give up.

Cashless exercise: In this technique, you borrow from a broker the amount you need to exercise your options and sell just enough of these shares to cover the costs. You receive the difference in stock or cash. Please note that this section is intended as only a very basic introduction to employee stock and option plans. The topic is complex and there are a large number of rules that must be followed in order to avoid penalties and maximize the benefit to you. If you are participating in a stock ownership plan or stock option program, or if you have shares or options from a former employer, we strongly encourage you to learn more and consider talking to a financial or tax professional before making any major decisionsTerm of the Day

Rule 12b-1 fee

An extra fee charged by some mutual funds to cover promotion, distributions, marketingexpenses, and sometimes commissions to brokers. A genuine no-load fund does not have Rule 12b-1 fees, although some funds calling themselves "no-load" do have Rule 12b-1 fees (as do some load funds). Rule 12b-1 fee information is disclosed in a fund'sprospectus, is included in tTerm of the Day

coattail investing
A trading strategy in which an investor tries to duplicate the performance of a successful (and usually well-known) investor by copying their trades as soon as they are madepublic. This is a risky strategy, since there is a time delay between when the successful investor's trades occur and when they are made public, and because the strategy disregards overall portfolio considerations, risk tolerance, and other unique circumstances

Social Security Benefits

by Rich White

he stated expense ratio, andWhen

to Start Receiving

When to start Social Security is a complex decision that should be personalized for each individual, and it can involve many factors, ranging from the potential to continue working, to attitudes about longevity andinflation. Permanent reductions for starting benefits before full retirement age are assessed on a monthly basis, so there is no hurry to make the start-date decision. By waiting to start until

three months after age 62, for example, you can avoid three months' worth of permanentbenefit reductions. Clearly, individuals have different levels of confidence in their ability to "invest the difference" successfully. Some people don't want the extra pressureof having to invest critical retirement assets in uncertain markets. As for the fear-based argument, Social Security benefits are not guaranteed, and Congress can make anyfuture changes it wishes.
Source(s):

Social Security and the Benefits Provided by It

InvestorGuide University > Subject: Retirement > Topic: Social Security > Social Security and the Benefits Provided by It by InvestorGuide Staff (Write for us!) The Social Security program is a Government-operated retirement plan that provides monthly income to retirees. It was designed to meet the basic needs of retirees, but if you're not yet close to retirement, we recommend that you don't rely too heavily on Social Security in your financial planning. Most people need 70-80% of their pre-retirement income to maintain the same standard of living, and the Social Security income is a lot lower than that.

If you work for an employer, Social Security taxes are withheld from each paycheck and sent together with the employer's matching contribution to the IRS; the company also reports your earnings to Social Security. If you are self-employed, you pay the Social Security taxes and the IRS reports your earnings to Social Security. "Credits" are earned through work and taxes; these credits go toward the Social Security benefits. In order to be eligible to receive the benefits, you are required to have at least 40 credits or 10 years of work.

The types of benefits provided by Social Security are:

Retirement The income received as retirement is based on the participant's average earnings during his or her life. There is a limit to the contributions made each year, but in general, the more a participant earns, the more money he or she will receive.

A participant is eligible to collect this income if "fully Insured", meaning that a person has to have worked for at least 10 years or 40 calendar quarters. The Social Security Administration will provide an estimate of the monthly income to those close to retirement.

In order to collect the benefit, the participant must be fully insured, be 62 years old, and must apply two or three months prior to the date of retirement. If you decide to wait until age 65, the benefits increase by about 7% for every year of delay.

Benefits can be lost after starting the collection of the income if the amount of the adjusted gross income is above a certain amount, which changes periodically. Also, part of the income can also be taxed if the retiree's AGI is above a certain amount.

Considering the amounts that you will receive at retirement it is important to look at all your other options. Make maximum contributions to tax-deferred accounts and diversify your portfolio.

Disability Benefits are payable if a participant has suffered sever physical or mental disabilities preventing them from working regularly for a year or more or in cases when the condition might lead to death.

Family Benefits A participant's spouse who is at least 62 years of age, or younger but caring for a child under 16 is eligible to receive retirement or disability benefits.

Survivors At death, some members of the participant's family can be eligible for benefits. The participant's widow(er) age 60 or older, or age 50 or older and disabled, or any age caring for a child under 16; and/or

balloon maturity
A repayment schedule for an issue of bonds in which a large number of the bonds comedue at the same time, typically the final maturity date. This term applies only to bonds which do not have a sinking fund provision. A balloon maturity can put company cash flow under stress if adequate preparations are not made.

Short Selling
InvestorGuide University > Subject: Stocks > Topic: Stock Strategies > Short Selling by InvestorGuide Staff (Write for us!) Short selling (or "selling short") is a technique used by people who try to profit from the falling price of a stock. Short selling is a very risky technique as it involves precise timing and goes contrary to the overall direction of the market. Since the stock market has historically tended to rise in value over time, short selling requires precise market timing, which is a very difficult feat.

Here's how short selling works. Assume you want to sell short 100 shares of a company because you believe sales are slowing and its earnings will drop. Your broker will borrow the shares from someone who owns them with the promise that you will return them later. You immediately sell the borrowed shares at the current market price. When the price of the shares drops (you hope), you "cover your short position" by buying back the shares, and your broker returns them to the lender. Your profit is the difference between the price at which you sold the stock and your cost to buy it back, minus commissions and expenses for borrowing the stock. But if you're wrong, and the price of the shares increase, your potential losses are unlimited. The company's shares may go up and up, but at some point you have to replace the 100 shares you sold. In that case, your losses can mount without limit until you cover your short position.

Here are a few reasons why short selling might make sense:

Some investors are better at identifying overpriced, bad companies than underpriced, good companies.

Brokers and analysts focus on what to buy, not what to sell, so the good news is more widely known than the bad news. When an analyst issues a sell recommendation on a stock, they find it much harder to get information from the company's investor relations department, and the analyst's firm would never get an opportunity to raise capital or float a bond for the company, so they focus more on good news than bad. If you discover bad news, it might not yet be totally factored in to the current price of the stock.

Many institutions just won't do short selling, leaving unexploited short selling opportunities from which you can benefit.

A portfolio which includes both long and short positions in stocks which tend to move together will generally have lower volatility than one which has only long positions. But short selling is not as easy and profitable as it may sound; there are a lot of caveats:

As we mentioned, there's unlimited downside potential (i.e. if the stock price keeps rising, you keep losing). Most short sellers set a limit to how much they're willing to lose, but then they become vulnerable to a short 'squeeze', in which long investors buy shares as the stock rises and demand delivery. As short sellers buy to cover their losses, the price continues to rise, triggering more short sellers to cover their losses, etc. This is a risk especially for small, illiquid companies. The danger is that even if the stock is overpriced, it may become even more overpriced, and you will have to buy it at some point to cover your position. When you sell short, you're not just betting on what the stock is worth, you're betting on what the market will be willing to pay for the stock in the future.

You're fighting the trend of the market, which is, in the long run, up. When you buy a stock that you're confident is greatly undervalued, you should feel content to wait as long as it takes for the dividends to start rolling in (provided youhave a sufficiently long investment horizon). When you're on the short side, however, you will eventually need to buy the shares back, at whatever the market price happens to be; and while you wait and wait for the speculative bubble to burst, the rest of the market will probably continue on its upward trajectory.

SEC rules allow investors to sell short only on an uptick or a zero-plus tick. In other words, you cannot sell a stock short if it is already going down. This rule is in effect to prevent traders

known as "pool operators" from driving down a stock price through heavy short selling, then buying the shares for a large profit.

Money from a short sale isn't available to the seller, but is escrowed as collateral for the owner of the borrowed shares. You aren't earning interest on the money (although big institutions sometimes do, in the form of rebates).

You have to pay any dividends that are earned (since in effect you have a negative number of shares).

You pay the (usually higher) short term capital gains tax on your profits, regardless of how long you held the short position.

Another company could acquire the company you're shorting, possibly at a significant premium, which would drive up the share price.

Sometimes shares aren't available to short. While we don't recommend short selling for the above reasons, you may decide to include it in your overall strategy. If you do, consider mitigating the risk by setting strict quitting prices (say a 20% loss per investment). If it reaches that limit, resist the temptation to hang on, thinking it's even more overpriced now. Successful short selling is all about timing, which makes it more like technical analysis than fundamental analysis.

Some short-sellers target the following types of companies:

Small cap companies that have been driven up by momentum investors, especially companies that are difficult to value.

Companies whose P/E ratios are much higher than can be justified by their growth rates. Companies with bad or useless products and services. Companies riding the latest fad. Companies that have new competition coming. Companies with weak financials (bad balance sheet, negative cash flows, etc.). Companies that depend too heavily on one product.

equity
Ownership interest in a corporation in the form of common stock or preferred stock. It also refers to total assets minus total liabilities, in which case it is also referred to asshareholder's equity or net worth or book value. In real estate, it is the difference between what a property is worth and what the owner owes against that property (i.e. the difference between the house value and the remaining mortgage or loan payments on a house). In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of abrokerage account, it is the net value of the account, i.e. the value of securities in the account less any margin requirements.

"Since the Industrial Revolution began, going downstream investing in businesses that will benefit from new technology rather than investing in the technology companies themselves has often been the smarter strategy." - Ralph Wanger

Two Laws on Bullish and Bearish Economists

by William Sherden

Remember the First Law of Economics: For everyeconomist, there is an equal and opposite economist--so for every bullish economist, there is a bearish one. The Second Law of Economics: They are both likely to be wrong.

> Introduction to Taxes and Basic Information by InvestorGuide Staff (Write for us!) You might think that taxes are a necessary evil better left for professionals, but understanding the basics can help you minimize the total amount of taxes that you pay.

When planning for taxes, we usually think of the Federal filing deadline of April 15, however, you are required to pay taxes throughout the year. Paying the right amounts throughout the year will save you from having to pay penalty charges for underpayments.

For most of us, the payments we make throughout the year are made on our behalf through our employers. Employers automatically withhold taxes from our gross earnings before giving us our net earnings, the little numbers on our paychecks (or big numbers for you lucky ones). Your employer is also responsible for reporting your total income and taxes paid by submitting form W-2 to the IRS. You must then file your taxes-which tells you the total amount of taxes owed and the total amount of taxes already paid-and either pay the difference (if your automatic deductions were too small) or collect the difference (if your automatic deductions were too big).

Throughout the year, there are important tips to follow in order to prepare for your taxes. First of all, get organized. Experts recommend the use of personal finance software to enter and maintain accurate records. Keep records of expenses such as automobile mileage incurred for business purposes and get receipts for charitable contributions. It is also very important that you maintain accurate records of the purchasing and selling of stock as well as stock options.

You may have heard before that you should contribute the maximum to your 401(k) retirement plan. Doing so will let you defer the taxes you pay on your contributions and will allow your contributions to increase through compound interest. Adjust your withholdings if your marital status changes or if you are in a different tax bracket than the previous year. If sufficient taxes are not withheld from your paychecks, or if you are self-employed, make estimated tax payments to the appropriate tax authority to avoid year-end penalties.

Make contributions to your IRA as early as possible in the year due to the benefits of compound interest . Also, consider tax-efficient investments such as tax-free municipal bonds or taxefficient mutual funds .

Tax Issues Related to Your Business

Small Business

Small businesses must withhold federal income taxes from their employee's wages and pay them directly to the IRS. The amount depends on the size of the payments, the number of exemptions claimed by each employee, their marital status, and the frequency of the payments. Each employee must complete a W-4 form to determine withholding exemptions.

Employers must also withhold 6.2% of each employee's income for Social Security and 1.45% of each employee's income for Medicare, in addition to the matching contribution that the employer makes.

Most employers are also required to pay federal and state unemployment taxes under the Federal Unemployment Tax Act.

An excise tax is a tax paid for the sale or manufacture of certain commodities. For example, environmental taxes, communications taxes, or fuel taxes could be excise taxes levied on a particular business. Depending on what the business manufactures or sells, some businesses might not be required to pay these at all.

Sole proprietorship A sole proprietorship is a company with only one owner that is not registered with the state as a limited liability company or corporation. The owner does not pay income tax separately for the company, but he/she reports business income or losses on his/her individual income tax return. The owner is inseparable from the sole proprietorship, so he/she is liable for any business debts.

Self-employed or sole proprietors report their taxes through Form 1040 and Schedule C for net profit and loss from their business. Employers are also required to make quarterly estimated tax payments if they expect their business to earn more than $1,000.

Partnerships A partnership is a business, which has one or more owners and that is not a limited liability company or corporation. Partners share equal responsibility for the company's profits and losses, and its debts and liabilities. The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax return. Estimated tax payments are also necessary for each of the partners for the year in progress.

Partnerships must file a return on Form 1065 showing income and deductions. Estimated tax payments are also required if they expect their income to be greater than $1,000.

Limited Liability partnerships A limited liability partnership is a business organization that has one or more general partners who manage the business and assume legal debts and obligations, and one or more limited partners who do not participate in the day-to-day operations and are liable only to the extent of their investments. As a limited partner, you share in the profits and losses, and these are taxable events to you. This means that if the partnership makes money at a point in the year and the general partners reinvest those profits instead of paying them to you, you may have to pay taxes even if you do not receive cash in return. Be sure to consult with a tax professional if you participate in a limited partnership.

Corporations A corporation is an independent legal entity, structured and regulated by state law. This implies that the owners of the corporation are not directly liable for business losses or debts. There are "C" corporations, which we will discuss below, and "S" Corporations, which are those who elect partnership-style taxation, as discussed in the Partnerships section above. Owners pay taxes on profits paid to them through salary, bonuses or dividends. The corporation itself pays taxes on annual profits, called net income. There are special tax rates that apply to this type of business. If a corporation were to pay out

its yearly after-tax net income to its owners in the form of dividends, the owners would be taxed on the dividends. This is called double taxation because the corporation's gross income is taxed and the dividends paid out to owners are taxed again. The double taxation only applies to dividends since salary and bonuses are part of the corporation's expenses and are tax deductible.

Corporations must file an income tax return, regardless of whether or not they received income, by filing Form 1120. "S" Corporations use Form 1120S and are also required to make estimated tax payments.

Non-profit corporations Non-profit corporations are those which are charitable, educational, scientific, literary or religious. These corporations do not pay federal or state income taxes on profits. Non-profit organizations also have the ability to raise public or private funds and receive donations from companies or individuals.

Self-employed

You can deduct up to 60% of your health insurance for yourself, your spouse and your dependents if you are self-employed or are an "S" corporation shareholder, or if you are not eligible to participate in an employer-subsidized health plan.

Home Office

You can decide to make your home your primary place for business and be eligible for a home office deduction. In order to make this claim, you need to identify the percentage of your home that is used for business purposes. To calculate this, divide the cube-footage of your home used for business purposes by the total cube-footage of your home. This percentage is applied to indirectly related expenses like utility bills, mortgage interest or rent, real estate taxes, repairs, trash removal, and maintenance. Expenses directly related to your business such as computers and printers are 100% deductible. Your primary phone line is not deductible, but a secondary

line and long-distance business calls are deductible.

Before taking advantage of these deductions, be aware of the consequences of selling your house. You might have to pay taxes on past depreciation claims and gains relative to the business portion of your home. Also, since your home office is no longer treated as part of your entire home, that part will not be subject to gain exclusion provisions for sale of a personal residence (up to $500,000 for married couples).

Also, be aware that since some taxpayers have abused home office deductions, the IRS is tightening the rules on home office deductions, so be sure to read the latest IRS information to confirm that you're following the rules.

Explanation of the Capital Gains Tax and Related Issues

InvestorGuide University > Subject: Taxes > Topic: Tax Basics > Explanation of the Capital Gains Tax and Related Issues by InvestorGuide Staff (Write for us!) Whenever you sell an investment at a profit, you will (in most cases) owe the IRS a tax known as a capital gains tax. This is true for most investments, including mutual funds, bonds, options, collectibles, your home, or business. Capital gains are the amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has actually been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold; the gain equals the difference between the purchase price and the selling price. The term capital gain is often used to mean realized capital gain. The opposite of a capital gain is a capital loss, which occurs when the selling price of an investment is less than the purchase price.

In relation to your home, you may be able to exclude the gains from the sell of your primary residence (the one you spend most of your time in) if you have lived in it for at least two consecutive years. The limit is $250,000 for single taxpayers and $500,000 for married couples filing jointly.

The IRS divides capital gains into two distinct categories, with each having different tax

consequences. Long-term capital gains are gains on investments held for more than a year, while short-term capital gains are gains realized on investments that are held for a year or less. Short-term capital gains are taxed according to your income tax bracket and long-term gains are taxed at 20% if you are in the 28% or higher tax bracket, and only 10% if you are in the 15% bracket. In other words, long-term gains are subject to lower tax rates because the IRS wants to encourage long-term investing.

The Tax Relief Act of 1997 created new rules, including low capital gains rates on assets held for more than five years:

If you are in the 15% income tax bracket you can take advantage of the five-year capital gains tax rates of 8%. This rate applies not only to investors who are single, but also to those married or filing jointly (granted you are still in the 15% tax bracket).

If you are in a higher tax bracket and your stocks and capital assets were acquired after December 31, 2000, you can take advantage of the five-year capital gains tax at a rate of 18%. The cost basis of your investment, the amount that was originally paid for the investment, can be determined by several methods:

If you purchased the investment, the cost basis is the amount you paid for it. If you inherited the investment, the cost basis is the value of the stock on the date of the original owner's death.

If you received the investment as a gift, the cost basis is the amount that was originally paid for the investment, unless the market value of the investment on the date the gift was given was lower. To determine the capital gains tax on an investment, subtract the amount paid for the investment, including any broker commissions, from the sales price to arrive at the capital gain or loss. Then take this amount and multiply it by the appropriate tax rate, which

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will give you the tax owed on the sale of your investment.

In the case of a mutual fund investment, you will likely have a capital gains distribution, which is the profit that the mutual fund made by selling securities for more than their purchase price. Federal law requires funds to distribute the realized capital gains and income to investors at least once a year. The tax status (short-term or long-term) of capital gains distributions is determined by the period of time that the mutual fund held the underlying security that was sold, not by how long you were invested in the fund.

One effective strategy for reducing capital gains taxes is to sell money-losing investments in the same year that you have offsetting capital gains, thereby reducing your capital gains taxes. In fact, if you still have a net loss position after offsetting all your gains with equivalent-sized losses, the IRS will allow you to apply as much as $3,000 per tax year toward a loss. If the losses are greater than $3,000 you can carry those losses forward to later years indefinitely. For example, some investors try to sell their money-losing investments within the first year, so they can offset their highly-taxed short-term gains, while keeping their winners for more than a year whenever possible. There is one significant restriction on the use of this capital gains offset strategy. You cannot deduct losses from a security if you repurchase the same (or a substantially identical) security with 30 days before or after the sale. This is known as the "Wash

Sale Rule", and it prevents investors from abusing the strategy by selling at a loss for tax purposes and then simply repurchasing. Wash Sale Rules are complex, and we encourage you to read the IRS guidelines about them.

Another capital gains reduction strategy is through the use of a tax-deferred account, such as an IRA or 401(k).

POST A C

The Stock Market

InvestorGuide University > Subject: Investing > Topic: Investing Basics > The Stock Market by InvestorGuide Staff (Write for us!) When people refer to "the stock market" or "the market" it can sometimes be confusing to beginning investors as to what those terms actually mean. Are they talking about all the stocks that trade on the NYSE, all the stocks that trade in the U.S., or all the stocks in the world? Typically when people refer to "the market" they are talking about all the publicly traded stocks in this country (they will usually say "the global market" if they mean the entire world). Indeed, the concept of "the market" can be a difficult one at first, especially since beginners tend to think of stocks as individual units. This section explains some different ways that investing experts think about the market as a whole.

Efficient Market

Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors (except, of course, insiders, but insider trading is illegal). Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that you should not be able to "beat the market" since there is no way for you to know something about a stock that isn't already reflected in the stock's price. That's not to say that efficient market theory fans claim that all stocks are necessarily priced correctly; instead, they claim that there is no way for you to know whether or not prices are too high or too low. Proponents of this theory spend little time

trying to pick stocks that are going to be "winners"; instead, they simply try to match the market's performance. However, there is ample evidence to dispute the basic claims of this theory, and most investors don't believe it.

Random Walk

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

Behavioral Finance

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

Bull and Bear Markets

In addition to the three market theories

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

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

Seasonal and Time-Related Market Factors

During certain times of the year or certain times of the month, the markets tend to exhibit certain behaviors more often than would be predicted by chance. For example, the early fall, October in particular, has historically been a time when the markets have slumped, although the effect isn't extremely pronounced and there isn't a logical explanation for it. Strong stock performance in January is another example of a seasonal market trend. The so-called "January Effect" occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise. But although the January effect has been observed numerous times throughout history, it is difficult for investors to profit from it since the market as a whole expects it to happen and therefore adjusts its prices accordingly.

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