Investment Help FAQ
If you are new to the world of investing, you probably have a lot of questions. The bankers and financiers on Wall Street seem to speak a different language, and sorting through all of those arcane terms can be difficult. Taking the time to understand investment terms can make you a better, and ultimately a richer, investor.
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What is Dollar Cost Averaging?
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Dollar cost averaging is one of the most powerful tools small investors have at their disposal. Dollar cost averaging is a simple concept, but it is a very important one to understand. When you dollar-cost-average into your favorite investment, you invest a set amount of money each month. For instance, you might have $100 or $200 a month transferred from your checking or savings account into a mutual fund. By investing the same amount of money no matter what the market is doing, you automatically accumulate more shares when the stock market falls, and fewer when it rises. So your $100 would buy you 10 shares of the mutual fund when it is at $10 a share, but only 5 shares when it is selling for $20 a share.
What is a Mutual Fund?
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A mutual fund is a vehicle that pools the money from many different investors and uses the money to purchase a basket of stocks, bonds or other securities. There are stock mutual funds, bond mutual funds, money market mutual funds and mixed funds that hold a combination of stocks, bonds and fixed income investments. Some mutual funds are actively managed, meaning that their money managers buy and sell stocks in an attempt to beat the market averages. Index funds, on the other hand, do not attempt to time the market. They simply buy and hold all of the stocks in a given stock market index. Index funds tend to be less expensive to own than managed funds, since they do not have to pay a money manager or incur trading costs.
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What Is Asset Allocation?
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Asset allocation simply means not putting all your eggs in one basket. When you follow an asset allocation strategy, you determine how much of your portfolio you want to invest in the stock market, how much you want to put in bonds and how much you want to put into safe investments like certificates of deposit and money market accounts. You then check the total value of all your holdings and compute the percentage in each type of asset. If your investments are out of balance, you can sell off some investments in one asset class and move the money to another.
What Retirement Plan Options Do I Have?
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If you work for a for-profit company, your employer might offer you a 401k plan. This plan allows you to have money withheld from your paycheck and invested in the mutual funds of your choice. The money you invest in your 401k is not taxed, and that in turn lowers your taxable income. You can contribute as much or as little as you want to the plan, but it is a good idea to invest at least enough to get the company to match. Many companies match the investments their workers put in, and that match can help your nest egg grow larger. A 403b plan works much the same way, but it is offered to workers in the public sectors, such as those who work in hospitals and schools.
You can also put money aside in a traditional or a Roth IRA account. The money you put into a traditional IRA can be deducted from your taxes, but you pay taxes on the money when you withdraw it in retirement. The money you invest in a Roth is not tax deductible, but you can withdraw the money tax-free when you retire.
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