Investing 101: Investment Basics for Dummies

Definition of investment

Investment is defined as any use of resources in hope of increasing future production output or income. In finance, Investment is putting money into something expecting gain over a period of time. In the context of this article, investment is the use of our monetary resources to increase our income or profit. 

Why is it important to know about investments?

Understanding about investments was always important, but never perhaps as important as it is today.

To begin with, there is a mismatch between our earnings and expenditure. By this, I mean that for those among us who are salaried, we earn a fixed salary per month, and this figure (hopefully) gradually keeps increasing. However, our expenditure pattern tends to be different. There is a fixed amount that we need to spend every month, which may include our day to day needs, rent / mortgage, car loan installment  education for kids and so on. But, we would also have expenses coming on an irregular basis i.e. furniture, an occasion in the family, an expensive holiday etc. Further, we shall be working for a limited number of years, but quite likely, we will be living well beyond the retirement age. With longer lifespans and increasing health care costs in our old age, we need to plan our investments well in advance to prepare ourselves for the “golden years” ahead.

Your personality type and risk-taking ability

Before we explore areas of investing, we need to assess our own profile and risk tolerance levels. One’s risk tolerance level could differ depending on whether one is a young student starting out, a newly married couple, a middle aged working professional, a multi-millionaire businessman, a 65 year old widow etc. Our risk taking ability and willingness would vary depending on who we are and at what stage of our life and careers.

A young student starting out might have an entry level salary, limited expenses but maybe a loan to pay off. A newly married couple may have dual salaries but might be planning to buy a house and so would have to consider outflows on account of a future mortgage. A 70 year old widow would perhaps be focused on minimal risk-taking to ensure she doesn't lose anything and makes enough return to take care of her daily expenses and some one-off health related spending.

As a general rule, I would always recommend taking a cautious approach to expenses based on our present income levels. This means that we should try and ensure that we keep our overall expenses well within our present income. For some of us, this tends to be more difficult than others, but in the long run, it’s an approach that almost always pays off. As we start saving more and more, we need to recognize that efficient use of this amount is going to ensure our sense of security and our lifestyle in the future.

Making an Investment Plan

With investments being so important for all of us, it is imperative that we spend sufficient time and effort to develop a good investment plan. Before developing an investment plan, we need to be aware of our income, our regular expenses, our irregular expenses (meaning expenses which come up once in a while) and an estimate of our future requirements.

In other words, you need to start out with taking an estimate of:

1. Present income

2. Your day to day expenses, mortgage, car loan, schooling of kids, insurance, health care etc.

3. Your one-off expenses. These can include your furniture, holidays, family occasions and events etc.

4. You finally need to make an estimate of how much you will save and how much of a nest egg you will need to build over a period of time to ensure sufficient availability as you close in on to your golden years.

Based on the above, you need to make an investment plan which should take care of:

1. Your short term needs- You need to set aside sufficient money to be able to take care of any short term requirements that you may have. These could be in the form of sudden medical emergencies, loss of job etc. Funds for these needs should be kept in liquid investments i.e. investments which can be withdrawn at short notice.

2. Your medium term needs – You may be single today, but you plan to get married in the coming few years and perhaps raise a family. You need to factor this into your investment plan considering the increased level of expenses that you might be faced with at that stage in the form of a larger house, a bigger car, schooling for child / children

3. Your long term needs – Over a longer time horizon, you need to build your nest egg to take care of your expenses post-retirement and to lead a decent lifestyle.

Types of investments

At a very broad level, we can classify investment types into:

1. Stocks: Equities, or stocks, entitle you to own a small share in a business. When you invest in stocks of a company, you are a part-owner of that company i.e. a shareholder. You will be compensated from the profits of the company by way of dividends. Your primary income will come out of the dividends paid on your shares, and from capital appreciation in the value of the stocks. When you invest in stocks, you can participate in the growth of a company, and this can potentially mean a manifold rise in the value of your investments in a short period of time. However, the risk in such investments is high and you can very well lose a significant portion of your investments if the stock price falls sharply. This can be due to a sudden or gradual change in the prospects of the company which may hamper their future profitability.

2. Mutual Funds: When one buys a mutual fund, one is pooling his / her money with a number of similar investors and giving the job of buying securities to a professional manager. Mutual Funds are set up with a specific focus, and this focus can vary significantly from one mutual fund to another. Some would invest in large cap stocks and others only in small cap, some might choose specific sectors e.g. automobile sector, infrastructure and others which might invest in specific markets i.e. emerging markets like China, Brazil, India etc.

3. Other investments: Other than the above broad types, there are a plethora of choices available for the investors, depending on his knowledge and understanding of the underlying assets, and his risk appetite. One can choose to invest in commodities (gold, copper, oil, agricultural products etc.), foreign exchange (investing in currencies other than your home currency), real estate (specific properties, Real Estate Investment Trusts, property derivatives etc.) and several other types. However, investing in any of these can entail significant risks for the investor. The other side of course is that one can stand to gain in a substantial manner also.

Author: Kieran TheDreamer

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The Best Time For You To Buy A Good House

Buying a good house is important and difficult task . It depend your luck and chance .If you are looking for a new house, chances are you want to get it for the best price possible, right? Right. So how do you know what the right time is to buy a house? Here are a few things to keep in mind as you are shopping and looking to put in an offer. 

First, think about the time of year you are out looking. It is generally accepted among the real estate community that the colder it is outside, the more likely you are to get your bid accepted. Why? 

Because there are fewer people looking to buy a house the later it gets in the year. Why? Well, who wants to move in the middle of rain, snow, sleet and wind? Not the ideal moving conditions. And because there are fewer people that want to move during that time of year, the fewer offers there will be on a given property. The fewer offers, the more apt the owner is to take the first reasonable offer that comes along. 

And, get this. The best time in the winter to buy a house is the week between Christmas and New Year’s. The reason for that is agents have forgotten about the properties that are still waiting to sell. They don’t expect a lot to happen during that week, and are excited when something does. 

Of course, another way to get the best price is to watch a certain property to see how much activity there has been on it. Also, you can do research to see how long the current owner has had the home. This may give you some insight as to how motivated they are. Have they changed realtors more than once to try to get the house sold? 

Wait until the market slows to make the jump into buying the home. The slower the market, the fewer offers. The fewer offers, the more likely the seller is to take the offer. They may be so happy to have an offer that they may take it as long as it is reasonable.

Also, with a slowing market, people with less than perfect credit will be able to qualify for a loan. That is because sellers are more motivated. As an example, take an owner that is asking $100,000 may take $89,000 for it. With taking so much less for the house, lower credit scores will be able to get a loan for the lesser amount. 

So, keep in mind, when you are looking at houses, that timing is everything. For some, timing is the changing season, for others it is the market as a whole. Be sure to watch the trends and pick out the best time for you and your situation.

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Warren Buffett's Five Tips for Individual Investors

1. "Look at stocks as parts of business. Ask yourself, 'How would I feel if the Stock Exchange was closing tomorrow for the next three years?' If I am happy owning the stock under that circumstance, I am happy with the business. That frame of mind is important to investing."
   
   
2. "The market is there to serve you and not to instruct you. It is not telling you whether you are right or wrong. The business results will determine that."
   
   
3. "You can't precisely know what a stock is worth, so leave yourself a margin of safety. Only go into things where you could be wrong to some extent and come out OK."
   
   
4. "Borrowed money is the most common way that smart guys go broke."
   
   
5. "The stock doesn't know you own it. You have feelings about it, but it has no feelings about you. The stock doesn't know what you paid. People shouldn't get emotionally involved with their stocks."
   
   

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Penny Stock Investing- Where Should I Start?

If you have been interested in penny stock investing for quite some time and don’t know where to start, this article will present the basics of penny stocks for dummies or down to earth, fool proof approach to investing in small cap stocks.

First of all, set aside a penny stock investing fund that could be anywhere from a couple hundred to a few thousand dollars for starters. Some penny stock brokers or online discount trading places might set an opening balance limit that you must comply with. Keep in mind that your penny stock investing portfolio should not by any means exceed 10% portion of your overall investment portfolio due to high market volatility of penny stocks.

The next step in penny stock investing is finding the actual penny stock broker or an online trading place. In case you are a small budget penny stock investor, you should definitely avoid hiring a penny stock broker, whose excessive trading fees might chip into your earnings. 

Before you actively start penny stock investing, get yourself educated on how to research the best penny stocks to buy and what financial criteria to look for in penny stock companies. You can find a plethora of information on specific penny stocks online or by subscribing to a wide variety of publications. In addition, knowing when to sell is one of the most important penny stock tips that are going to make or break your
penny stock investing experience.

To round up our article on how to start penny stock investing, it’s important to emphasize that penny stock market is a highly volatile environment where you can quadruple or lose all your investments. Knowing the rules of the penny stock trading game is your foundation for success.

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10 Financial Lessons from Warren Buffet

Today’s infographic lists the top 10 financial lessons that we can learn from the third-richest man in the world and someone who is regarded as a smart investor. Here’s the list:

Source: Best Finance Schools

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How to become a CPA

The CPA (Certified Public Accountant) is one of the most popular and useful certifications for accountants that you can get as an accountant. It is also one of the most difficult professional accreditation you can get. If you ever thought about becoming an accountant and getting your CPA, here is the process

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Return On Equity

Return on Equity (ROE) is a great overall measure of a company's profitability because it measures the efficiency with which a company uses shareholders' equity. Think of it as measuring profits per dollar of shareholders' capital.

As a rule of thumb, firms that are consistently able to post ROEs above 20% are generating solid returns on shareholders' money, which means they are likely to have economic moats. Significantly, Return on Equity can tell us more than just the efficiency of using shareholders capital. ROE provides a direct peek into how well a firm balances - profitability, asset turnover and financial leverage - to provide decent returns on shareholders' equity.

This is because there are only three levers for boosting ROE -Net Margin, Asset Turnover and Financial Leverage. Lets see why this is so by examining the return on equity formula.

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ROE = Earnings/Shareholders' Equity

Alternatively this can also be expressed as
ROE =(Earnings/Sales)x (Sales/Assets)x (Assets/Shareholders' Equity), or

ROE = Net Margin x Asset Turnover x Financial Leverage
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So we have three levers that can boost Return on equity -net margins, asset turnover, and financial leverage. For example, a firm can have only so-so margins and modest levels of financial leverage, but it could do a great job with asset turnover (e.g. a well run discount retailer). Companies with high asset turnover are extremely efficient at extracting more rupees of revenue for each rupee invested in hard assets. A firm might have asset turns only middling, and the firm might not have much leverage, but say it has great profit margins (e.g. a luxury goods company)-that would make for decent ROEs. Finally, a firm can also boost its ROE to respectable territory by taking on good-size amounts of leverage (e.g mature firms such as Utilities).

Calculating Return on Equity

Return on Equity is simply calculated by dividing annual earnings divided by shareholders' Equity. Annual Earnings can be taken from the Consolidated Profit and Loss Statement from the firm's Annual Reports. The Shareholders Equity can be found in the Balance Sheet filed in the firm's Annual Reports. Annual Reports can usually be found at the firm's website. Shareholders Equity is simply the difference between Total Assets and Total Liabilities -the assets that the business has generated. Shareholder equity is an accounting term that represents the assets created by the retained earnings of the business and the paid-in capital of the owners.

Rough benchmarks for analysing a stock's ROE

In general, any non-financial firm that can generate consistent ROEs above 15 percent without excessive leverage is atleast worth investigating. And if you can find a company with the potential for consistent ROEs over 30%, there's a good chance you are really onto something.

Two Caveats when using ROE to analyse stocks

First, Banks always have enormous financial leverage ratios, so don't be scared off by a leverage ratio that looks high relative to a non-bank. Additionally, since banks' leverage is always so high, you want to raise the bar for financial firms - look for consistent ROEs above 18% or so.

Second caveat is about firms with ROEs that look to good to be true, because they are usually just that. ROEs above 50% or so are often meaningless because they have probably been distorted by the firm's financial structure. Firms that have been recently spun off from parent firms, companies that have bought back much of their shares, and companies that have taken massive charges of ten have very skewed ROEs because their Equity base is depressed. When you see an ROE over 50%, check to see if the company has any of these above-mentioned characteristics.

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Anyone Can Be an Investor

Yes, anyone can be an investor in the markets. Nowadays it isn't that tough and doesn't even require a bankroll to get started.

What is required to invest in the markets is desire. A few other things are good also: willing to learn, ability to control your emotions, and sometimes patience. Your desire can be based on many things; simply to make money, to secure your retirement; to be able to afford those items you dream about; to pay for a child's college education...just to name a few.

The investment choices are many today, but the easiest to learn involve stocks, mutual funds and ETFs.

Why should you invest?. The reason is really simple. It's just about the only way to get more dollars in your pocket. Yes, you can invent the next greatest thing in technology and eventually make millions, or perhaps your one of the 1% that will inherit a fortune decent enough that you can live the lifestyle of your dreams. Or maybe your dream is to own your own business where you can have the luxury of working for your employees 60 or 80 hours a week (I did that and enjoyed it-for awhile!).

But the reality is that if you want to not worry about how to pay for your car repairs, buy a new car, go shopping (ladies) for shoes, get the latest smartphone or DSLR camera, then you need another source or income.

A recent search I did showed one online store listing 966 books on stock market investing. Obviously a big subject that attracts lots of people. But when I go to the local bookstores I never see anyone browsing the business or finance section...maybe a few when I visit a big city bookstore. And they surely don't stock 966 titles, maybe ten or even 40. But who even picked those? Who decided those books will help you?

Yes you probably need to read a basic beginners book about investing, but take it with a grain of salt. Check out the online sites like Scottrade, Fidelity, Schwab, eTrade as starters. You will be surprised at how easy it is to get started with just a few dollars, although starting with $100 or even better yet a thousand or two is better.

Each of these sites allow you to sort, sift and filter to find good investments or you can use independent software to help you make the right decisions.

The right decisions are about when and what: when to buy and when to sell; what to buy and what to sell. This is the hard part, the part where you want to remove your emotions because no matter how much you like Disney, for example, today may not be the right time to buy. Buying and selling need to be based on credible information and analysis, and not on what you like or don't like.

Are you scared, afraid, frightened? What was your reaction the first time you drove a car? Excited yes, but a bit nervous too. And the first time you drove in rush hour traffic, was that not a rush?

Well investing is similar. There is a learning curve and whatever set of tools you use for investing there will be a learning curve. But just like learning how to drive is a necessity in our culture, or using a computer, learning how to invest successfully and safely is equally a necessity to your future.

By Raymond Dominick

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Top 10 Successful Real Estate Investing Secrets

Successful real estate investing is not a dream but a reality for people who know top 10 secrets on how to become a landlord and live by them every day. Real estate success does not only happen to very smart people with extensive educational background and six figure salaries; on the contrary, anybody who has strong desire to succeed and motivated to take charge of his own financial future can do this. All of us are conventionally taught to study well at school so we can then go to college, graduate and join corporate America work force and start living an ideal American Dream life. A lot of people work hard 60-80 hours a week, earn good salaries but still feel like they are not getting anywhere. Even some very high compensated executives do not have the financial freedom to quit their jobs and start living the life they really desire.

What are the secrets to real estate investing and how can you accomplish a worry-free financial future for your family and finally start living the lives you want? Before we begin, it’s important to remember that estimated 80% of millionaires in America earned their fortunes through real estate investing.

1. Real estate investing is NOT a get quick reach scheme but rather a structured system comprised of investing strategies, clearly defined goals being fueled by immense desire to obtain financial freedom. Understanding what it is you want at the end of real estate investing is one of the most important principles that lie at the basis of any success. Are you a single Mom who wants to spend more time with her children or perhaps you hate your job because you would rather be traveling all over the world instead? Essentially, becoming a successful landlord gives you this freedom of leading the life that you want. Defining these goals and devising your personal realistic plan is the key!

2. Do not be fooled that you can do this on your own. Unless you have the professional training in real estate investing you might not know all the basics, underwater stones and key strategies to real estate investing. Many novice real estate investors try buying their first residential investment property without really knowing what to look for in a property. If you would rather not waste the time and your hard earned money, getting help from professionals is a must. Joining one of the real estate courses is a great opportunity to learn firsthand advice from experienced investors. Not all real estate courses are created equal, look for the ones that offer not only information but a mentoring program. Find out whether mentors own their own investment properties and how successful they are at it. One of the best real estate investor programs is Lifestyles Unlimited based in Houston, TX that offers not only detailed ongoing educational courses and real estate case studies classes but a mentoring program that allows first time real estate investors to learn steps to buying a house and personally coach them on how to accomplish this in their individual situations.

3. Deciding how you want to profit from real estate investing is important. There are 2 major approaches that real estate investors use in order to profit, namely, buying several residential properties and receiving monthly cash flow while holding on to the properties and the second one is buying a property below its market value, fixing it to enhance its value and reselling it. Understanding all pros and cons of both types of transactions will help you decide which strategy to undertake. Either way, the ultimate goal is to find a property below its market value allowing you to receive monthly cash flow and/or profit from capital gains and future appreciation.

4. Never buy a residential, retail property for sale, commercial property for sale or any other type ofinvestment based on the potential future appreciation. What if this appreciation never happens and you will end up losing thousands of dollars? You simply cannot sustain this type of investment if you are not receiving monthly cash flow. Cash flow is an absolute must! Cash flow is the difference between rent money received and mortgage money paid. As a general rule you should stay away from buying properties that are not returning at least 15% on the money you invested in the deal. Walk away from such properties and search elsewhere.

5. Know the buying a house checklist and follow it to a tee! Never buy a residential investment home without an inspection, title insurance, without pre-approval for a mortgage and other important aspects. You simply cannot cheat in real estate investing, it will backfire at you when you least expect it!

6. The secret to successful real estate investing is to not finding a good property but finding a great real estate agent or a land investment companies if you are buying land and establishing a relationship with them. Real estate agents have access to databases on residential, multi-family, commercial and foreclosure listings that you will not be able to find on your own fast. You can certainly browse through some free foreclosure listings but is it really a good way to kill time? Once you find several real estate agents, it’s worth presenting yourself as a prospective real estate investor looking for properties to buy. Specifying your price ranges, property areas and other important information will make you look credible in their eyes. In addition, professional real estate agents can help you write effective and solid property and land purchase agreements.

7. If you have little or no money, there are still a number of ways to land your first investment property. In today’s buyer market there are lots of sellers you paid too much money for their properties and can no longer sustain owning them. You can consider multiple ways of purchasing a property using one of the following, a wrap around mortgage, property exchange, renovations for purchase down payment, life estate and more. Additionally, you can partner up with another real estate investor and use partnership cash flow to fund future investments.

8. Take measures to improve your credit score. A high credit score is your pathway to getting loans at a much lower rate compared to individuals with a poorer credit. First, you need to review your credit report by requesting it online from one of three major agencies, Trans Union, Experian or Equifax. If the information there is not accurate, disputes must be filed in a timely manner. You might be tempted to apply to one of credit repair services or debt consolidators; it’s one of the worst things that could happen to your credit history. Paying your monthly bills on time regularly and keeping your debt load at a reasonable level should help you improve your FICO score over time. For individual with no credit history like young adults (recent high school graduates or college students), it’s highly recommended to get a credit card, paying bills on time, thus establishing a good credit history.

9. Find good tenants. Ultimately, the biggest part to success in real estate is finding people who are willing to pay you money to live in your properties. Doing a thorough criminal background check credit history and requiring a security deposit and first month’s rent in cash before tenants move in are probably three most important aspects on finding good renters. In today’s economy there’s a surplus of renters but not enough high quality residential housing people actually want to move into. However, don’t be too picky about your tenant selection by setting such high tenant standards that you cannot find people to fit into them. It’s OK to rent to families with pets but asking for a larger security deposit is your way to make up for potential repairs if necessary.

10. Re-invest cash flow or capital gains from sold properties into buying more houses or considering larger multi-family properties or perhaps land purchases, or government property for sale By doing this you are building a foundation of wealth that will result in more cash flow in the future.

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What's the Best Way to Save Money to Invest?

You don't necessarily have to be frugal to save money, but you should definitely learn to manage your money. Get familiar with the concept of cashflow. It's the failure to understand this simple concept that causes many professional athletes to go broke within two years after retirement. Investors that got rich by implementing passive residual income strategies truly understand that cashflow is also important to creating wealth.

Knowing how to keep your money is a lot more important than knowing how to make passive residual income. All the money in the world means nothing if you are constantly spending above your means. Look at Mike Tyson, and Michael Jackson as two prime examples of people that made multi-millions annually but yet they had to declare bankruptcy.

In addition to understanding the concept of cashflow, here are some specific things to look into.

Shop wisely

Never buy new cars. I paid $15,000 for a sports car that normally costs $45,000. Cars depreciate $5,000 just from you driving it off the car lot and most cars rapidly lose value over time. Everyone wants to buy brand new cars but you can get some huge deals if you buy low mileage used cars. I remember once a dealer was willing to knock $3,000 off the price of a car simply because it had 3000 miles on it.

Don't try to "keep up with the Jones'" by getting the latest trends.

Shop during the off season and look for clearance sales. Buy your winter clothes in the summer and buy your summer clothes in the winter. Look for clearance sales when companies are looking to get rid of their inventory in preparation for the new season. You can get discounts of up to 60% and sometimes more by following this method.

Look at all the ways you're spending money now and find cheaper alternatives.

Shop around for cheaper car insurance.

Most insurance companies raise rates every year simply because they can. If you make a point to shop around for a new carrier every time your policy is up I guarantee that you will get a competitive rate that is better than your current one.

Cheaper cell phone plans. Do you really need 5000 cell phone minutes for $140? Could you do with 1000 for $40? Also there are a lot of phone plans (MetroPCS and Boost Mobile) that offer unlimited minutes for as low as $40. You just have to shop around.

Cancel memberships you don't need or are not using. If you are not making use of your $20 per month video game subscription, cancel it. If you live in a complex that has a gym, or if you can work out at home, then you can consider cancelling your gym membership as well.

Finally

Set up a separate account and set up an automatic transfer of a fixed amount of money to that account every time you get paid. Once you have a decent amount of money in your investment account you will be well on your way to making passive residual income.

By Dale Poyser

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Warren Buffet Investment Quotes

Best Investing Quotes, Top quotes of Warren Buffet

If you are interested in the stock market, there isn’t a chance that you haven’t heard of Warren Buffet. He is one of the famous investor of all time, he is the founder and CEO of Berkshire Hathaway, a holding company which owns subsidiaries that engage in  diverse business activities. When it comes to investing in companies,

Warren Buffett is THE MAN

Here is an Infographic on Best Investing Quotes from Warren Buffet

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