Explaining stocks and the stock market

Stocks are more than just a piece of paper (and sometimes not even that)

1. Stocks aren't just pieces of paper.

When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings.

2. There are many different kinds of stocks.

The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example.

3. Stock prices track earnings.

Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock's price will go up, down or sideways.

4. Stocks are your best shot for getting a return over and above the pace of inflation.

Since the end of World War II, through many ups and downs, the average large stock has returned close to 10% a year -- well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

5. Individual stocks are not the market.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

6. A great track record does not guarantee strong performance in the future.

Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip.

7. You can't tell how expensive a stock is by looking only at its price.

Because a stock's value depends on earnings, a $100 stock can be cheap if the company's earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim.

8. Investors compare stock prices to other factors to assess value.

To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company's performance expectations to those of its industry is also common -- firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

9. A smart portfolio positioned for long-term growth includes strong stocks from different industries.

As a general rule, it's best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

10. It's smarter to buy and hold good stocks than to engage in rapid-fire trading.

The cost of trading has dropped dramatically -- it's easy to find commissions for less than $10 a trade. But there are other costs to trading -- including mark-ups by brokers and higher taxes for short-term trades -- that stack the odds against traders. What's more, active trading requires paying close attention to stock-price fluctuations. That's not so easy to do if you've got a full-time job elsewhere. And it's especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wracking.

At some point, just about every company needs to raise money, whether to open up a West Coast sales office, build a factory, or hire a crop of engineers.

In each case, they have two choices: 1) Borrow the money, or 2) raise it from investors by selling them a stake (issuing shares of stock) in the company.

When you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings.

Individual stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done.

Nevertheless, it's that ownership structure that gives a stock its value. If stockowners didn't have a claim on earnings, then stock certificates would be worth no more than the paper they're printed on. As a company's earnings improve, investors are willing to pay more for the stock.

Over time, stocks in general have been solid investments. That is, as the economy has grown, so too have corporate earnings, and so have stock prices.

Since 1926, the average large stock has returned close to 10% a year. If you're saving for retirement, that's a pretty good deal -- much better than U.S. savings bonds, or stashing cash under your mattress.

Of course, "over time" is a relative term. As any stock investor knows, prolonged bear markets can decimate a portfolio.

Since World War II, Wall Street has endured several bear markets -- defined as a sustained decline of more than 20% in the value of the Dow Jones Industrial Average.

Bull markets eventually follow these downturns, but again, the term "eventually" offers small sustenance in the midst of the downdraft.

The point to consider, then, is that investing must be considered a long-term endeavor if it is to be successful. In order to endure the pain of a bear market, you need to have a stake in the game when the tables turn positive.

source: cnnmoney

Choosing the right life insurance

What you need to know about life insurance, including types of insurance policies and deciding on how much coverage you need.

1. All policies fall into one of two camps.
There are term policies, or pure insurance coverage. And there are the many variants of whole life, which combine an investment product with pure term insurance and build cash value.
2. Insurance is sold, not bought.
Agents sell the vast majority of life policies written in the U.S. because the life insurance industry has a vested interest in pushing high-commission (and high-profit) whole-life policies.
3. Whole life is expensive.
Policies with an investment component cost many times more than term policies. As a result, many people who buy whole life often can't afford an adequate face value, leaving themselves underinsured.
4. Whole-life policies are built on assumptions.
The returns quoted by the agent are simply guesses - not reality. And some companies keep these guesses of future returns on the high side to attract more buyers.
5. Keep your investing and insurance strictly separate.
There are better places to invest - and without the high commissions of whole-life policies.
6. Buy enough term coverage to fill your needs.
Life insurance is no place to skimp, especially with rates at historic lows.
7. Match the term of the policy to your needs.
You want the policy to last as long as it takes for your dependents to leave the nest - or for your retirement income to kick in.
8. Buy when you're healthy.
Older people and those not in the best of health pay steeply higher rates for life insurance - so buy as early as you can, but don't buy until you have dependents.
9. Tell the truth.
There's no sense in shading the facts on your application to get a lower rate. Be assured that if a large claim is made, the insurance company will investigate before paying.
10. Use the Web to shop.
Buying life insurance has never been easier, thanks to the Internet. You can get tons of quotes - and avoid the pushy salespeople.

Whole-life policies, a type of permanent insurance, combine life coverage with an investment fund. Here, you're buying a policy that pays a stated, fixed amount on your death, and part of your premium goes toward building cash value from investments made by the insurance company.
Cash value builds tax-deferred each year that you keep the policy, and you can borrow against the cash accumulation fund without being taxed. The amount you pay usually doesn't change throughout the life of the policy.
Universal life is a type of permanent insurance policy that combines term insurance with a money market-type investment that pays a market rate of return. To get a higher return, these policies generally don't guarantee a certain rate.
Variable life and variable universal life are permanent policies with an investment fund tied to a stock or bond mutual-fund investment. Returns are not guaranteed.
The other type of coverage is term insurance, which has no investment component. You're buying life coverage that lasts for a set period of time provided you pay the monthly premium. Annual-renewable term is purchased year-by-year, although you don't have to requalify by showing evidence of good health each year.
When you're young, premiums for annual-renewable term insurance are dirt cheap - as low as a few hundred dollars per year for $250,000 worth of coverage.
As you get older, premiums steadily increase. Level-premium term has somewhat higher - but fixed - premiums for longer periods, anywhere from five to 30 years.


 source: CNN money

You’ve probably heard the phrase, "living within your means." But what does it really mean? Simply put, if you’re living within your means, you can pay for the things you need without getting trapped in more debt than you can handle. However, many of us believe that the only way to have nice things is to go into debt to get them. While that may be true for some large purchases such as a house or car, it doesn't have to apply to the other things we need in life. For example, when you buy a house, you take out a mortgage, and you may be in debt for as long as 30 years. That’s a long time, but this type of debt comes with benefits. The interest you pay on the loan may be deducted from your taxable income, and the equity—or money you have in the home—may be used for future loans. Making regular mortgage payments also helps you build a strong credit rating. However, buying food, clothes, toys, furniture and other items on credit is different. By doing this, you may be going into debt to buy nonessential things. Plus, the interest charged is not tax-deductible, so by the time you’ve paid for the item and all the interest, the cost is much higher than the original price. Simply put, you're robbing yourself—and your future. Instead of funding your dreams and the life you deserve to live, your hard-earned money fills the lender’s pockets. Wouldn’t it be better if the money you pay in interest could go into a savings account to help you reach your goals? Paying for everyday items by going into debt limits your choices because you’re constantly caught paying for yesterday instead of moving toward tomorrow. It can be challenging at first, but try to live within your means. Even better, try to live below your means.  source: managemymoney

Cut taxes without itemizing

By Kay Bell | Bankrate.com –

Taxes » Tax Deductions » Cut Taxes Without Itemizing

What do teachers, divorcees and people paying off student loans have in common? They can cut taxes, without itemizing.

These filers, along with other taxpayers who fit into special categories, might be able to claim at least one of the dozen-plus deductions found directly on Form 1040 without hassling with Schedule A.
Taxpayers who file Form 1040A can claim a few of these tax deductions on that shorter form, too.

Adjustments, not deductions

Officially, these breaks are identified as adjustments to your income. But they are popularly referred to as above-the-line deductions because you subtract them on Page 1 of your Form 1040 or Form 1040A, just above each form's last line where you enter your adjusted gross income, or AGI.
Taking these deductions will reduce your AGI, which in most cases, directly cuts your overall tax bill because figuring your AGI is the first step in arriving at your final taxable income amount. The less taxable income, the less you'll owe the Internal Revenue Service.
While these deductions mean that Form 1040 filers don't have to hassle with Schedule A, a few above-the-line tax breaks do require you to fill out another IRS form or work sheet. Still, that's a relatively small time commitment to shave some dollars off your tax bill.
Listed below, in the order in which they appear on lines 23 through 36 of Form 1040, are the current above-the-line deductions.
1. Educator expenses. With the educators' expenses deduction, teachers and other public and private school system employees can subtract up to $250 they spent on classroom supplies.
2. Certain business expenses. Unreimbursed business expenses also appear on Schedule A as a miscellaneous deduction. But some taxpayers can claim work-related costs directly on line 24 without worrying about a percentage threshold. You do, however, have to fill out Form 2106 or 2106-EZ.
The special taxpayers who qualify for this adjustment are military reservists, performing artists and fee-basis government officials. Although this collection sounds more like the cast of an avant-garde foreign language film than related taxpayers, lawmakers have deemed that anyone who falls into one of these categories deserves special tax treatment. If you are in one of these three fields, check the Form 2106 instruction book for filing details.
3. Health savings account deduction. A health savings account, or HSA, is a medical coverage plan that works much like an IRA. Eligible participants put money into an HSA where it grows tax-free and withdrawals can be made to pay medical, dental and vision-care costs not covered under a corresponding high-deductible health care policy.
4. Moving expenses. If you relocated for job reasons, some of your expenses can be deducted on line 26. You will, however, also have to fill out Form 3903.
5. Self-employment tax. If you're self-employed, you have to pay Social Security and Medicare taxes -- the amount collected from you as an employee and you as an employer. But you get to deduct half of those payments on line 27.
6. Self-employed retirement plans. If you have a self-employment pension plan, such as a Keogh or a SEP-IRA, deduct any contribution amounts on line 28.
7. Self-employed health insurance. As an entrepreneur, you now can deduct 100 percent of health insurance premiums you paid for yourself, your spouse and dependents. Don't forget to count what you paid toward long-term care policies. You get a partial break here, too. Enter the amount on line 29.
8. Penalty on early withdrawal of savings. On line 30, the IRS gives you a break when someone else slaps your hand. If you cashed in a certificate of deposit and paid an early withdrawal penalty, you'll find the amount on the 1099-INT or 1099-OID that the account manager sent you. The IRS lets you subtract that charge from your income.
9. Alimony paid. Divorced filers get a chance to recoup alimony payments on line 31. Be sure to include the Social Security number of your ex-spouse, so the IRS can make sure he or she reports the payments as income. Without the recipient's tax ID number on your return, the deduction could be disallowed.
10. IRA deduction. If you contribute to a traditional IRA, you might be able to deduct at least a portion of your contribution from your income. Precisely how much you can claim on line 32 of Form 1040 depends not only on your contribution amount, but also on your adjusted gross income and whether you or your spouse participate in a company-sponsored retirement plan. It requires some calculation, but run the numbers. This above-the-line deduction could help lower your taxable income.
11. Student loan interest. Up to $2,500 of the interest you paid on a qualified student loan can be subtracted on line 33. The loan can be for you, your spouse or a dependent. Note that there are income limits and married taxpayers who file separate returns cannot claim this adjustment.
12. Tuition and fees. The higher-education tuition and fees adjustment could reduce your taxable income by as much as $4,000. You'll need to complete Form 8917 and then enter the amount of tuition and fees deduction calculated there on line 34.
13. Domestic production activities. This above-the-line deduction was created to encourage "made in the U.S.A." manufacturing efforts. U.S.-based businesses that manufacture products domestically instead of sending the work overseas might be able to deduct up to 9 percent of the money earned or 50 percent of the wages paid in connection with the production effort, whichever is less. This tax break applies not only to such expected occupations as construction or farming, but also is available to certain creators of software, films or recordings.
You'll need Form 8903 to figure the exact credit that goes on line 35 of your Form 1040.
We're out of designated adjustment lines as we reach the bottom of Page 1, so that's the end of the nonitemizing tax breaks, right? Wrong.

Some specialty adjustments

Although line 36 simply instructs you to total your entries on all the previous adjustment lines, curious taxpayers who take a closer look at Form 1040 instructions will find even more possible ways to whittle away some of their taxable incomes.
Sure, several of these adjustments, such as reforestation amortization or repayment of specific supplemental unemployment benefits or court costs for certain unlawful discrimination cases, are for relatively limited tax situations. But a couple of the adjustments affect quite a few taxpayers.
Line 36 is where you enter any pay you got for serving on a jury, but then turned it over to your boss because you got your regular pay while at the courthouse.
Contributions to special medical savings accounts offered by some small businesses also are accounted for here. You'll need to fill out Form 8853 to determine the amount to enter on this catchall line.
So take a moment to check out all these other possible above-the-line deductions. Details are in the Form 1040 instruction book. If you're one of the select group of taxpayers to whom these apply, claim the amount and add the special notation spelled out in the instructions to line 36. The extra adjustments could really pay off.
Now it's time to add all these specially annotated line 36 amounts to the deductions claimed on the preceding 13 income adjustment lines. This final number goes on line 37. Once entered there, it's subtracted from the total income amount you entered on line 22. The result: your adjusted gross income.

A few also on 1040A

What if you don't want to or need to use the long Form 1040? You still get a chance to reduce your income if you file Form 1040A instead.
Four of these above-the-line adjustments -- educator expenses, IRA contributions, student loan interest and tuition and fees -- also can be deducted on lines 16 through 19 of that slightly shorter tax return.

 

5 Keys To Financial Success

By Bernice Napach

If Alexa Von Tobel had her way, there would be a primetime reality show that focuses on educating people about their personal finances, just as "The Biggest Loser" educates people on eating healthy.
"I love that show," says Von Tobel, a Harvard graduate. "The six million people who tune in every Tuesday learn about healthy choices and the basics of living a healthy lifestyle. I wish there was a show like that about personal finance."
Von Tobel didn't create a TV show but did probably the next best thing. With $75,000 of her own funds and $1.1 million seed money from Goldman Sachs, she started LearnVest, a Web site dedicated to helping ordinary people organize their financial life. "You can stop a lot of [financial] problems from starting if you simply empower people to have some of the financial basics in their head before they start," she says in an interview with The Daily Ticker.
Her first words of advice: have a financial plan. "Understand what you're trying to achieve for the next three to five years and understand how to dice up all of the dollars you take home every month."
Her other top recommendations:
-Live by a budget

-Prioritize Debt Repayment

-Have 6 Months Worth of Emergency Savings on Hand

-Start Saving for Retirement Now

-Negotiate Your Salary

Von Tobel says many people haven't grasped these "financial basics" because they're not part of the public school education system. "There's a huge lack of financial literacy in America simply because it's not taught formally in our school decisions......yet it is a topic that affects us every single day of our lives.