In a press release (TradeKing’s version and Zecco’s version) they state the combined total of both firms will equal 1/2 million clients and $3 billion in assets. While that amount of clients isn’t small, it isn’t large either. Fidelity for example has over 20 million customers, but they are one of the largest firms. Vanguard manages $1.6 trillion in assets. Keep in mind TradeKing, and Zecco are targeting a different audience as well. Getting a larger customer base allows them to offer services in much more volume than previous.

Out of the two brokers I’ve reviewed, I’ve favored TradeKing over Zecco. Zecco from my experience while not bad, kept changing their pricing model. Zecco initially started with a freemium model, to then requiring a minimum of $2,500 for free trades, then $25,000, to today with $4.95/trade. I wasn’t a customer of theirs at the time of the changes, but I’m sure I wouldn’t have been happy with the constant commission fee change.

Hopefully with the merger, they will take the best of both companies. TradeKing has better customer service, online education, and their TradeKing Live service is pretty intresting. Zecco has better mobile integration, FOREX, tools, and online community.

If you are customer of either broker, you should have little to worry about with the merger process. The actual merger should be pretty seamless, since they both use Penson as the clearing house. Front-end services, like their social networks, might take some time to integrate and could prove more difficult.

More importantly, what’s not clear with this merger is who is buying who. The official word from Zecco and TradeKing is it’s a equal acquisition. So what does this exactly mean then to the naming? Will the company take on something like when Sirius and XM Radio merged, and how are now called SiriusXM? TradeKing Zecco, or Zecco TradeKing sounds a little wordy for me.

If was involved with the branding, I would take on TradeKing’s name. Zecco used to stand for ZEro Cost COmmission. Since this is no longer applies, why keep the name? TradeKing in my opinion has much more brand equity in the industry and best suited in the new company, regardless of who is merging with who. The other option is a brand new name, but then you must start from scratch with an new brand name. This could prove somewhat difficult in the crowded discount broker field.

You can see an online video from the CEOs of both companies discussing the merger.

Both companies have setup web pages for the merger, and will post updates as the merger progresses.

• TradeKing
• Zeccofa

Readers: What do you think of the merger?

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• Zecco Announces Zecco Elite
• TradeKing – Trade Free On Friday
• Zecco Trading No Longer Free
• TradeKing Lowers Their Option Pricing
• TradeKing iPhone App Released

TradeKing Merging with Zecco is from Investor Junkie Copyright © Empowering Media, Inc.

From the SmartMoney survey, it appears people should avoid WellsTrade like the plague. I don’t have direct experience with Wells Fargo’s brokerage so I can’t speak from experience. If you do have an account with them and would like to write a review, please contact me. I am always looking for unbiased reviews of the brokers. Please add your comments to any of the brokers we’ve already reviewed, if you haven’t done so already.

Vanguard is not on the list this year. Similar to the Barron’s survey, I suspect they opted out of the SmartMoney survey. Last year Vanguard did not rank very well. From my experience, Vanguard is great of buying their ETFs and mutual funds, but poor for any other investment product outside of Vanguard’s funds. I suggest getting a Vanguard account for only Vanguard funds.

For the third year in a row, Fidelity ranked #1 with SmartMoney. I completely agree with their review. We have most of our assets with Fidelity, and believe they have the best mix of investment options. From the beginner index only investor to the active trader, Fidelity should suit most of your needs.

Best Discount Brokers of 2012

A much more detailed table is available in their article. Click on the link for our reviews of the listed brokers.

Absent from the list were: OptionsHouse, OptionsXpress, and Vanguard.

Commissions and Fees

Best: Scottrade
Worst: WellsTrade

It is interesting to note they found from 2011 trading fees are down to $7.96, from $8.27 last year. While this is good for the consumer, the brokers are getting much more obtuse with their fees and commissions. Be aware many charge an exit fee when closing your account with them. Fortunately some brokers, will reimburse this exit fee. For example, TradeKing will pay up to $150 to cover this fee.

Customer Service

Best: TradeKing
Worst: WellsTrade
Like last year, TradeKing remains the best broker in customer service. From my direct experience with TradeKing, it is still my favorite broker to use for my WTF fund. Their prices are reasonably low, and had a great experience every time I contacted customer service.

Research

Best: Fidelity
Worst: WellsTrade
Fidelity has a large amount of free research available online. This includes rudimentary Morningstar information. While I do use Fidelity’s screeners from time to time, I still prefer to do most of my research with Morningstar.

Trading Tools

Best:Fidelity
Worst:WellsTrade
Fidelity wins the category this year, with E-Trade and TD Ameritrade very close behind. Remember speed of trading execution is important! While I’m not suggesting you become a day trader, the time you place to order till the actual execution can be a few minutes. This of course depends upon the exchange the equity is traded on an various other technical details I won’t discuss in this article. Though realize just because a broker has cheap trades it can cost money in the time broker takes to execute your trade. This is another “hidden” fee with your broker.

Fidelity was the fastest brokerage at trade execution, clocking in at less than four seconds per trade. The two slowest brokers of the bunch — WellsTrade (14.5 seconds) and Merrill Edge (16 seconds) — took almost twice as long as the industry average. Merrill Edge says some recent technical upgrades are improving trading speed; Wells Fargo says security measures might add extra seconds to its trading time.

Mutual Funds and Investment Products

Best: Fidelity
Worst: ShareBuilder
This is the same results from last year. In my opinion this survey is accurate. Fidelity shines in this area, and ShareBuilder definitely does not. Fidelity has a wide array of investment products. Interactive Brokers is better, but is more geared towards investment professionals and not retail clients. ShareBuilder on the other hand is better at stocks, than mutual funds.

Many discount brokers offer no trading fees for specific mutual funds, or ETFs. This makes firms like Fidelity, and TradeKing much cheaper than ShareBuilder.

Banking Services

Best: Merrill Edge, Fidelity (Tie)
Worst: Zecco

Fidelity recently introduced their iPhone/iPad app for deposits through your phone. A very neat feature and eliminates the amount of times I must visit their branch office. Fidelity also offers branded credit cards. A Visa with decent cash back terms, and American Express card that gets 2% cash back. It is no surprise Zecco is in last place since it’s not the target audience they want to acquire.

Best Full-Service Brokers

Not to be left out, SmartMoney also released their best full service broker list for 2012 as well. Except for UBS, I do not have any direct experience with the brokers, and suspect I won’t in the future. I’m not saying they are bad per se, but based upon the ability to manage our own money. Full service brokers definitely have their place in the investing universe, but not in the Investor Junkie household.

1. Edward Jones
2. UBS
3. Raymond James
4. Merrill Lynch
5. Wells Fargo Advisors
6. Morgan Stanley Smith Barney

Related posts:

• Barron’s 2012 Broker Survey
• Barron’s 2011 Broker Survey
• How to Choose an Online Broker
• Stock Broker Reviews (Updated 2011)
• TD Ameritrade Review – The Perfect Online Broker?

SmartMoney 2012 Broker Survey is from Investor Junkie Copyright © Empowering Media, Inc.

A price to earnings ratio is a very simple valuation metric; it’s the price of a stock divided by the earnings of the company per share of stock. A company that has a per-share price of $15 and reports $1.50 of earnings would have a price to earnings ratio of 10. The company sells for a price 10 times its most recent earnings.

So why do I say that PE ratios don’t matter? Why would I think investors might put too much emphasis on PE ratios?

The Case for Killing the PE

Here’s why I think PE ratios are more likely to mislead investors than put them on the trail towards the next hot stock:

1. Accounting trickery – Earnings can be inflated any which way you so desire. One way that companies can show positive earnings is to change the underlying dynamics in their pension programs. That makes for a great earnings quarter, but it does not change the mechanics of the business. Earnings go up on a nominal basis, but the true value of a business is left unchanged.
2. Inaccurate Smoothing – Earnings often represent an inaccurate picture as cash flow to a business may not appear at the same time the company records positive earnings. For example, a company that earns $100 million per year every year for 5 years is very different from a company that has free cash flow of $0 for 3 years before 2 years of $250 million cash flows. If the company needs cash to pay down debt, or to expand, positive earnings do little to help the company’s business. However, positive free cash – cash which is free for further investment or debt repayment – can expedite the realization of the business’ goals. Take this as far as you need to. Let’s say you’re a new college graduate who can expect to earn $4 million over your lifetime. Would you rather receive $4 million cash at graduation, or $4 million in year 40 of your career? Any logical person sees that cash in hand is worth more than cash in the future.
3. A Single Year Look – Price to earnings multiples shown on popular finance sites are for the most recent year. A woman on StockTwits tweeted that she was irritated that automaker Ford could not seem to find traction and move higher, even though it had a crazy low PE ratio of 2.2. Alas, Ford’s price to earnings multiple is calculated based on last year’s earnings. Last year, Ford accounted for a large, one-time earnings adjustment due to tax liabilities. Ford recorded an amazing accounting profit last year, but it hardly affects the business going forward. One cannot expect that because Ford “earned” nearly $20 billion last year because of tax accounting that the company will do it next year.

Warren Buffett on Accounting Earnings

Buffett – and most value investors, for that matter – are usually the most outspoken critics of accounting earnings. Buffett says he likes businesses that generate earnings in the form of cash. It’s one thing for an investor to invest in a business where “earnings” are just left in the form of more inventories, or more factories. It is another thing all together to report earnings and actually have the earnings available to owners in an asset that does not affect the business’ operations.

Think about it this way: you can’t take a factory out of a business to pay yourself. You could, but you’d severely cripple the business in doing so. You can remove free cash from a business without affecting a manufacturing business. Unless earnings result in free cash, though, there’s nothing to distribute.

Turning Earnings in Cash

A great example of a business that turns earnings into cash is Mastercard. The company provides credit and debit card processing services. This is not a very capital intensive business – you don’t need to buy factories, or invest in capital to process credit cards.

The company turned 85%, 84%, and 132% of its earnings into cash each year in the period from 2009-2011. Compare these figures to a company like CSX, a railroad operator. CSX turned 53%, 91%, and 66% of its earnings into cash in the same period. Building and maintaining railroads obviously requires far more money than does building out a credit card processing business. Where Mastercard has people, CSX has billions of dollars in railroads and infrastructure. Paying a salary to operate is much better than deploying cash in major investments that have a 20, 30 or even 50-year timetable.

True Wealth Creation

It’s really all about true wealth creation. While we could all mindlessly compound our assets over the long haul, at what point do we get to realize the benefits of a high net worth? Who cares if you own a billion dollar manufacturing business if all your cash flow is being reinvested into retooling your factory every few years just to stay in business?

Who cares if your cash washing business “earns” you better technology in your car washing business each year? You can’t turn sponges and wax into food without affecting your ability to do business.

And this is why it’s so important to disregard PE ratios and earnings on single stocks. A better ratio would be the owners’ earnings ratio – or free cash flow yield. An owners’ earnings calculation allows investors to see which companies are making an economic profit – a profit which can be distributed back to shareholders. While owning more of a business is excellent, owning more of a business that actually turns earnings into cash is a much better alternative.

Ignore PE ratios, and really just ignore earnings all together. Consider earnings only when it is possible for companies to turn those earnings into cash. And as a rule, look for the firms that end up with the most cash relative to their reported earnings. Morningstar has a “key ratios” page for any public company, which allows you to see at a glance how much of a company’s earnings actually ends up in cash.

No related posts.

Why PE Ratios Don’t Matter is from Investor Junkie Copyright © Empowering Media, Inc.

Looking at Price Movement

Much of the time, technical analysis focuses on price movement. Instead of considering intrinsic value, technical analysis is all about the actual results of market action, and price is a big part of that. Technical analysis isn’t about “undervalued” or “overvalued;” rather it is about analyzing the price action and trying to find patterns that might indicate what might happen next with a particular investment. Some of the assumptions of technical analysis include:

• The price includes everything: According to technical analysts, everything about the investment — including the fundamentals — are included in the price. The price reflects everything that affects the investment, so the price offers an accurate look at where things stand, and price history can give a clear picture of overall trends as well as short-term possibilities.
• Price movements happen in trends: Most technical trading strategies are based on the assumption that prices move in trends. Once a trend is established, the price is expected to continue moving in that direction — until the trend is played out, and a new trend established. There are various indicators that provide insight into trends, including support levels and resistance levels.
• History often repeats itself: Technical analysis also assumes that price movement is repetitive. Charts are a big part of technical analysis, and some go back decades. This ways, investors can scour the price movements for evidence of recurring patterns. By figuring out the patterns, it’s supposed to be possible to figure out what might happen next with an investment by studying the historical data.

The use of charts requires that you look for patterns. Many investors draw trend lines to help identify different patterns that indicate the direction a stock may be moving. Different patterns indicate bullishness or bearishness. Patterns are classified as continuation and reversal. A continuation pattern indicates that the trend will continue in the same vein, once the pattern completes. A reversal, though, means that the trend will head the other direction once the pattern finishes.

In technical analysis, you study to learn the different patterns, and what they represent. However, interpreting charts can be a little fiddly at times; sometimes it’s hard to spot the pattern — or adequately understand what it indicates. Know what to expect when a pattern ends can help an investor figure out what to do next.

Technical analysis is used with many different investments, but we often hear about it most in stocks and in currencies. Technical analysis is especially popular with day traders who look to find the ideal times to enter and exit positions in a way that allows them to earn profits. Like all analysis, and all investing strategies, though, it’s important to consider whether or not it suits your style, and to remember that there is always the possibility of loss.

Readers: Do you believe in technical analysis? If so why? How is technical analysis better than fundamental investing?

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What is Technical Analysis? is from Investor Junkie Copyright © Empowering Media, Inc.

Segmenting Geographic Investments

One can make the case that American firms are very much proxies for international economic growth. Google, Microsoft, Coca-Cola, and other large cap stocks have practically just as much interest in foreign markets as they do at home. The important thing to remember, however, is that the earnings attributable to any of the above firms all flow into the same bank accounts.

That is to say international earnings may subsidize local weakness. Or local earnings strength may subsidize international earnings weakness. To go overseas requires real, tangible investment interest that is not connected to a corporate entity at home. Holding stock in firms in your local market with some overseas exposure is vastly different than owning shares of two companies, one wholly American, and another entirely overseas.

Displacing International Investment Risk

International investments are not without their risks, which investors should seek to minimize. More importantly, investors should align their risks with potential rewards. It makes little sense to accept more risk in a portfolio if the expected returns do not increase at the same time.

Some of the most prominent risks in the emerging markets are:

1. Foreign-exchange risks – The relative value of an American dollar to a foreign currency. Fluctuations in currency values can offset gains or losses in international investments. Likewise, fluctuations can also compound gains or losses.
2. Political risk – Emerging markets are notorious for problems that relate to politics. There are countless concerns here, ranging from regulatory issues and corruption to the simple understanding that a government in power today may be gone tomorrow.
3. Informational risks – The United States has the most stringent accounting and disclosure rules of any country around the world. Public information taken for granted by American investors is far better than information available to investors in other markets. Where there is less information guiding a particular investment decision, additional risks exist. Investing is all about reliably predicting the future.

Investors who wisely manage their portfolios should be able to minimize these risks while improving the potential upside. While these risks are inherent in any international investment, investors do not have to accept risk without reward. Let’s look at how investors can better align potential reward with the international risks.

Spotting Unique Opportunities

Emerging markets have something unique about them: growth. In particular, markets like China, India, Brazil, and (to a lesser extent, Russia) all have the makings of a growth story based on an emerging middle class.

An emerging middle class in fast-growing international markets makes a great case for investment interest. However, it makes sense to pursue an investment when it can be directly tied to the catalyst for emerging market growth.

International Investing Example

Investors seeking access to Russian markets could buy one of many hundreds of Russian oil firms. However, there is nothing that delineates Russian oil from oil produced elsewhere around the world. In this case, the investor accepts greater risk in an emerging market without extra upside.

International investments with better links to the consumer are a far better wager on a risk-to-reward basis. Consider Tata Motors in India, the largest auto producer in South Asia. The company derives a majority of its earnings in India and China, where it sells very popular commercial and consumer vehicles. Compared to American automakers, it is much better positioned for sales to new middle class families and businesses that serve the new Asian middle class.

The risk is the same – political risks, currency risk, and informational risk are no different by sector, however the upside with vehicles is far better than oil, as it is directly-related to the growth story in the particular market. All things considered, an American investor wanting access to Asia’s rapidly growing consumer market would do better to be invested in cars than a foreign oil producer. Oil prices are smoothed by international demand from all over the world; car sales in a specific region have everything to do with local, not international, developments.

How to Find Quality Funds

If international funds are your preferred method to find international exposure, a quick glance of the fund’s investment exposure can show just how well connected the fund is to the international growth story.

Let’s compare two example exchange-traded funds, INDY and SCIF. INDY is an Indian large cap fund. The SCIF ETF is a small cap fund for Indian securities. A quick look at INDY shows that more than 50% of the fund is invested in financials, technology, energy, and consumer defensive stocks – these are all products that have only minute exposure to a growing middle class.

The SCIF ETF, on the other hand, has far more invested into consumer cyclicals, which make up 21% of the fund. The other largest sectors include industrials, real estate, and basic material stocks, which have some but, not a lot, of exposure to rising wages. In any event, the fund holds nearly twice as much of the “good stuff,” consumer cyclical stocks, as the INDY fund.

When it comes to developed markets, the closer you can get to the consumer and further you get away from commoditized sectors, the better your fund will respond to the emerging markets. Ideally, investors would opt for funds with the highest concentration in investments like consumer products and real estate and shy away from funds concentrated in energy or financial services companies, which have virtually the same business model and opportunities regardless of geographic area. Energy and financial services exposure is best kept at home, since there is no reason to interject risk into a sector just for the purposes of diversifying internationally.

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• REITs vs. Real Estate Investing
• What I’m Investing In Now
• There’s No Such Thing as a “Risk Free” Investment.

Investing Internationally – How to Get the Best Results is from Investor Junkie Copyright © Empowering Media, Inc.

The Mechanics of Pensions

Pensions can come in two forms: defined contribution plans and defined benefit plans. Defined contribution plans are those like the 401(k), which are much more difficult for companies to fool with to achieve their earnings projections. We’ll stick to defined benefit plans, those that fit the traditional profile of a pension where workers receive a percentage of their earnings in perpetuity after their retirement date.

Defined benefit plans require long-term projections for any business. The setup shifts the burden of retirement to the business, which must save a portion of its employees’ pay so as to cover the future costs of their retirement. Like individuals, businesses must plan to save enough given an expected annual return so as to have enough in cash and investments to pay out pensions decades into the future.

Making Pension Projections

Businesses have to report their pension surpluses or deficits in each quarterly or annual report.

To project the total costs of a pension, the business relies on actuaries who forecast how many payments will be made to each employee before the average worker passes away. This is mostly an mathematical certainty, as we know with very good accuracy how long an average worker is expected to live and thus how long the median person will receive benefits paid by the company.

Projections are then made for the projected benefit obligation. The projected benefit obligation is the amount that the company will have to pay out on an actuarial basis over a very long time. This amount is then discounted back to today using an expected growth table for investment gains on pension assets.

Thus, we use the “plan assets” reported in any filing and the “projected benefit obligation” to determine whether or not the pension is adequately funded.

• If plan assets are greater than the projected benefit obligation, then the pension is over-funded – there is enough capital to continue paying pensions at the current rate well into the future.
  
• If plan assets are less than the projected benefit obligation, then the pension is underfunded, meaning the business will have to contribute more to the pension fund, or achieve a higher rate of return.

How Companies Fool Investors with Pensions

Accrual accounting allows for a myriad of methods to fool investors when it comes to short-term earnings. (This is just one of the many reasons why so many investors focus on free cash flow – it’s hard to fake cash, and much less difficult to fake earnings.)

Here are just a few ways pensions can be used to buffer earnings:

1. Changing the discount rate – Changing the discount rate on pension assets is a great way to uncover more cash. By decreasing the discount rate from 4% per year from 3%, for example, a business can easily see its pension assets skyrocket as its obligations to workers are held constant. An underfunded pension quickly becomes overfunded, and the surplus can be removed from the pension balance and recorded as income, even if there was no real change in the underlying pension assets. Less future obligations means more earnings in the present, as earnings are realized today and not over time with accrual accounting.
2. Changing wage growth – A reduction in future wage growth tends to affect pensions, as pensions are calculated based on the wages of employees. By shifting downward future wage growth, the pension sees lower future obligations to employees.
3. Juicing expected returns – A higher return on pension assets allows for the company to dedicate fewer assets to cover future pension payments to retired employees. The problem is that markets are not 100% predictable, and often a pension will fall short of the expected return.
4. Liability hiding – An underfunded pension is a very real liability. However, you will not find pensions listed in balance sheet – pensions are an off-balance sheet liability much like long-term leases, joint ventures, or other irregular programs not generally considered debts. This does not directly affect earnings, however, it does allow for firms to score higher in terms of debt to equity, or return on equity calculations.

How to Fight Pension Differences

The complexities of pensions were first brought to light to the masses by Benjamin Graham, one of the world’s best value investors. In his book, Securities Analysis, he lays out the case for better accounting of pensions. Several decades later, accounting standards have improved, though investors still need to exercise caution.

Some key disclosures make finding pension problems easier for investors:

1. Equity and fixed-income split – Companies are required to show how pension funds are invested in a split between equity investments (stock) and fixed-income products (mostly bonds). The returns on the pension program can be compared to a similar split of indexes to determine whether or not the pension can reasonably keep pace with expected growth.
2. Discount rate adjustments – Discount rate adjustments are reported in the disclosures section to highlight changes up or down and the rationale for such a change. Beware that increases in the discount rate make expected obligations smaller, and decreasing the discount rate makes expected obligations larger, all else being equal.
3. Labor cost increases – Companies should report the number of participants in the plan, and should make note of the company’s own contributions toward a defined benefit program. Expected wage growth should also be documented in the disclosures. In the best case scenario, companies should forecast wage growth at the current inflation rate, if not higher.

Ideally, companies would project higher than average wage growth, a low discount rate, as well as a low growth rate going into the future. Lesser companies will report low wage growth, a low discount rate, and a low growth rate greater than or equal to the discount rate so as to hide a pension that will undoubtedly become insolvent in the future.

Luckily for investors, the defined benefit pension previous generations may have enjoyed is going the way of the dinosaur. Fewer firms offer defined benefit programs to employees, and many are switching to defined contribution plans, as retirement planning considerations can then be shifted away from the business and to employees.

Next time you see a company post higher or lower earnings, look to the pension disclosures to see if any of the change is due to pension differences. In rising markets, higher equity prices allow for companies to report a blossoming pension fund balance.

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• Why PE Ratios Don’t Matter
• Could Disney Make a Good Addition to Your Income Portfolio?
• You’re A Patsy If You Buy Facebook’s IPO
• Investing Internationally – How to Get the Best Results
• What Is Profit Margin?

How Companies Distort Earnings with Pensions is from Investor Junkie Copyright © Empowering Media, Inc.

What Are Your “Options”?

It’s possible to trade stock options through different online brokers — many of which even provide you the opportunity to use mobile trading apps to execute your options orders. But, as with all investing, it’s important that you pay attention to fees. Higher fees can erode your returns. If you are looking to save on fees, here are some of the brokers that offer lower-cost options trading:

• OptionsHouse: If you are looking to trade options, someplace like OptionsHouse can be a good deal. There is a 5 for $5 promotion on, or you pay $8.50. There is also a $0.15 per contract charge. OptionsHouse also offers 100 free trades with a new account. The margin interest rate is 4%, and there is no minimum balance.
• Zecco: Zecco is fast becoming a go-to brokerage for those looking to trade a number of opportunities (Zecco even offers forex trading). The commission at Zecco is $4.50 + $0.50 per contract on options. Trading on margin requires a $10,000 minimum, and comes with a 7.20% interest rate.
• TradeKing: This brokerage offers prices that are slightly higher than Zecco’s. There is a $4.95 + $0.65 per contract fee to trade options. However, TradeKing is a very trusted name in online brokerages, and many like the familiarity. Plus, if you trade on margin, there are no minimums and the interest rate is 6.50%
• Scottrade: This is the point at which we start seeing the costs head a little higher for options trading. Commissions on options are $7.00 + $1.25 per contract. However, there are no minimums for margin trading. The interest rate is on the high end, though, at 7.75%.
• Charles Schwab: Many brokerages charge the same base commission for stocks trades as for options trades. Charles Schwab, though, actually offers a lower flat base rate on options than it does on regular stock trades. Instead of $12.95 for stock trades, Charles Schwab offers options trades at $8.95, and the additional $0.75 per contract. The minimum for margin trading is $7,500, and the interest rate is 8.50%.
• TD Ameritrade: You can trade commission-free for 30 days at TD Ameritrade. There is a $9.99 + $0.75 per contract cost on options. You don’t need a minimum balance to trade on margin, but there is a rather high interest rate of 9.25%.
• ShareBuilder: Even though ShareBuilder’s commission is slightly lower than TD Ameritrade’s, the per-contract options fee makes up the differences and means that TD’s is slightly lower. ShareBuilder costs $9.95 + $1.00 per contract. The margin rate, though, is lower at 8%, and there is no minimum balance.

Other online brokerages like TradeMonster and E-Trade charge more than $12 for a base commission on options trades. ThinkorSwim charges a $9.95 base rate, but there is an additional $2.95 per contract charge on options. Before you get into options, make sure you understand how they work, and be careful about the fees you pay.

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• E*TRADE Enhances E*TRADE Pro Platform
• 7 Great Apps from Online Brokers
• TradeKing Lowers Their Option Pricing
• TradeKing – Trade Free On Friday
• Is E*Trade Up For Sale?

Looking to Trade Options? Here are Some of the Lowest Rate Brokers is from Investor Junkie Copyright © Empowering Media, Inc.

This grim situation has increasingly forced students to turn to parents and family members for college financing assistance. In fact, many families – even those that would never provided financial assistance a generation ago – and now opening 529 plans and treating college savings like a retirement account: they put money in on a regular basis, keep it separate from all other online banking funds, and hope that it grows enough to pay off tuition, loans, or future debt.
A 529 plan is a tax-advantaged fund that can be used solely as a vehicle for college savings. If you or your child is currently attending school (or is planning to attend in the future), it’s an investment that you likely want to keep in mind. Here are a few tips for getting the most out of your 529 plan:

• Start as early as possible. The best advice for retirement savings is also the most important when college costs are concerned: start early. Even if you don’t plan on paying for most of your child’s college education, opening a plan when they are young (or, even better, when they are born) provides the maximum opportunity for the plan to grow over time.
• Get a 529 savings plan. There are two types of 529 plans: savings plans and prepaid versions. While both confer advantages upon the student and the student’s family, the savings plan is usually preferable as it allows for maximum returns. This is because prepaid plans simply hedge against inflation while savings plans allow for full investment in the market.
• Know which funds are being invested in. While it is best to keep a hands-off approach with your 529 plan from a spending perspective, this does not mean you should ignore where your money is being invested. On this note, make sure that you know what underlying investments (likely mutual funds) constitute the bulk of your fund.
• Lower your risk as payment approaches. Some people are too conservative in their 529 investments and others tend to take too many risks. Perhaps the best way to forge an appropriate balance – a balance that insures maximum returns without putting savings in jeopardy – is by balancing the fund to make investments less risky as college payment approaches.
• Spend all plan money on tuition, books, and related college costs. This may go without saying, but one of the major disadvantages of the 529 plan is that it incurs a heavy tax penalty if any funds are spent on non-college costs. This issue can be avoided by simply being responsible with the way you draw cash from the account.

These are some of the main tips to keep in mind when using a 529 plan. Although the plan somewhat limits a person’s investment options and can lead to significant penalties if incorrectly used, there are few better options when college savings are concerned. With this in mind, then, it is important that every student and family understands the 529 and knows how to maximize its benefits.

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• 5 Steps to Creating a Successful Financial Plan
• Perry Tax Plan: Choose Your Tax Rate
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Getting The Most Out Of Your 529 Plan is from Investor Junkie Copyright © Empowering Media, Inc.

Both of these funds share some similar characteristics. Mutual funds and ETFs are both linked to the investments held in the funds, and they provide the opportunity to purchase a number of investments at once, in a sort of lot. It is important to note, however, that there are differences between the two.

Mutual Funds

Mutual funds are collections of investments. These can be actively managed, with managers changing the composition of the fund to meet certain goals, or they can be index-linked, following the investments on a specific index.

For the most part, mutual funds are either open-end or close-end funds:

• Open-End: Shares are purchased, but the investor, from the fund company. Values are determined daily, and there are no limits to the shares issued.
• Close-End: Only a specific number of shares are issued, and the NAV doesn’t determine the price of the fund.

With a mutual fund, the price isn’t figured until the end of the business day, and the NAV is determined. As a result, mutual fund shares are traded differently, and you won’t see them traded the same way a stock is. Additionally, while index funds have relatively low fees, other types of mutual funds often have fairly high rates. Mutual funds can come with sales loads, and an actively managed fund can come with rather high administrative fees.

Finally, it’s important to note that when you want to sell shares in a mutual fund, the fund has to sell shares to pay the investor. The result is that shares sold at a higher price than what they are bought for result in capital gains, which much be distributed to fund shareholders. You might end up paying taxes because of mutual fund turnover.

Exchange Traded Funds (ETFs)

On the other hand, ETFs are a little different. Instead of being a collection of investments, ETFs are composed of units of underlying investments. They are created and redeemed in large lots. And, interestingly, they trade like stocks on the market. This means the price changes regularly, and they are more flexible and easy to trade.

Like mutual funds, you might have to pay a yearly fee, but the fee is often quite small. Plus, there is no need to sell investments held in an ETF when an investor wants to redeem shares. This means that you are unlikely to be surprised by capital gains taxes due to fund turnover. It is also worth noting that the fact that trading can take place at a different price than the NAV, ETFs offer the possibility of arbitrage.

There are three main types of ETF:

1. Exchange Traded Open End Index Mutual Fund: Connected to an index, and the dividends are reinvested when received, and paid to shareholders quarterly.
2. Exchange Traded Unit Investment Trust: This type of ETF is characterized by the requirement to fully replicate the designated index. There are also weighting and issue requirements, and dividends aren’t reinvested automatically — although they are paid out quarterly.
3. Exchange Traded Grantor Trust: Even though this is most similar to a close-end fund, the investor in this type of ETF owns the underlying investments. HOLDRS are good examples of this type of ETF, in which the fund composition remains the same, and there are restrictions on trading.

Make sure you do your research before making any investment decision. Once you understand the differences between an ETF and a mutual fund, you can better make the right decision for you.

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• Fidelity Commission Free ETFs
• Bonds Vs. Bond Funds
• Vanguard Review
• 2 Ways To Maximize Your Roth IRA Returns
• What Is The IRS Wash Sale Rule?

Mutual Funds vs. ETFs is from Investor Junkie Copyright © Empowering Media, Inc.

If you’re a savvy investor, increasing the size of that tax-free retirement nest egg is high on your list of priorities. And with (at best) a $6,000 maximum annual contribution limit, you’ll want to maximize the annual rate of return on your Roth IRA investments if you hope to enter retirement with any meaningful amount of money in your Roth IRA.

How Do You Maximize Your Annual Returns?

In my opinion, the two best methods for maximizing your Roth IRA returns are to:

1. Give Yourself Greater Control
2. Lower Your Investment Costs

The more control you have over your investments and their associated costs, the better they will perform.

Stay In Control

Some investments give you greater control than others. For example, if you invest in an index fund that tracks the performance of the S&P 500, you know that your investment performance will more or less mirror the performance of the S&P 500. You’ve made a conscious decision to have your investment mimic that index. And while you can’t make the market obey your every command, you are in control of your ultimate destiny.

But let’s say that instead of investing in an index fund, you invest in a mutual fund not tied to any particular index or asset class. In this case, you’ve given up control. Control over your investment is placed in the hands of a money manager you probably don’t know, and this can be very dangerous to your performance. In such a scenario, the fund manager can take excessive risks with your money such as betting 90% of the fund’s assets on appreciation of the Russian ruble. Maybe it’s a decision you would agree with, but maybe it’s not. Either way, you’re NOT in control.

Even though every mutual fund comes with a prospectus that outlines the fund’s overall investment strategy, fund managers can still deviate from that strategy, and you won’t know it until the quarterly reports are released. Does this really put you in control?

In some cases, investors who give up control are subject to fraud. For example, let’s say you agree to give a stock broker power to manage your portfolio for you. A dishonest broker might engage in “churning” a process whereby he constantly buys and sells positions within your account in order to receive higher commissions. This practice is illegal and unethical, but it still happens.

In extreme cases, investors who give up control can find themselves victims of a scam or an elaborate Ponzi scheme. The most notable and recent examples are the vicitims of Bernie Madoff. These investors gave up control and oversight of their money, entrusting Bernie Madoff to wisely invest on their behalf. Instead, he stole their money.

Don’t let this happen to you. Do your own research, and put yourself in control. Even if you ultimately invest your money in managed funds, make sure you do lots of research, you know what the risks are, and you keep yourself regularly informed in regard to what’s happening.

Understanding your investments and properly managing the associated risks goes a long way in preventing the loss of capital and poor investment returns.

Lower Your Investment Costs

Lowering your overall investment costs is often overlooked as a key to superior investment returns. A few pennies here and there may not sound like much, but when viewed in the context of decades of compound growth, a few pennies can add up to serious dollars.

This is especially true in regard to your Roth IRA. Why? Because the IRS limits the amount of money you can contribute to your Roth IRA each year. If you squander it on unnecessary Roth IRA fees, you can never put it back.

For instance, most people have a maximum annual Roth IRA contribution limit of $5,000. If you needlessly spend an extra $50 per year on investment costs, this constitutes a full 1% of your annual contribution. And 1% can add up to a lot over time.

So how do you lower your investment costs? The primary methods involve lowering your transaction costs and your operating costs.

Lower Your Brokerage Fees (Transaction Costs)

Each time you invest money, there’s probably some sort of transaction cost associated with it – such as a brokerage fee for buying and selling stock or front-end or back-end fees called “loads” for mutual funds.

The best Roth IRA investments minimize these transaction costs.

For example, Investor #1 might systematically invest $400 per month in his Roth IRA, using the funds to purchase an ETF each month at $7 per trade. This adds up to $84 per year ($7 x 12 months).

Investor #2 on the other hand, researched low-cost online brokers and found one that allows him to invest the same $400 per month in an index fund transaction-free as long as he doesn’t exceed more than 3 transactions per month. This saves Investor #2 $84 per year, which doesn’t sound like much – does it?

But an extra $84 per year at a 12% rate of return over 40 years adds up to a lot – $64,435.68!

Furthermore, the difference between Investor #2 and someone who trades frequently (racking up hundreds of dollars per year in brokerage fees) is staggering. Despite these large sums, the money you save lowering your transaction costs pales in comparison to the money save by lowering your operating costs.

Lower Your Expense Ratios (Operating Costs)

Unlike brokerage fees which eat up an incremental amount of your principal with each transaction, operating expenses eat up a percentage of your principal on an annual and ongoing basis.

This can prove quite costly as even the smallest of percentages (represented by an expense ratio) can add up to a lot of money over the long-term.

For example, let’s say Investor #1 invests $5,000 per year in a mutual fund with a 1.1% expense ratio – meaning the company which operates the mutual fund charges 1.1% of your annual account principal as a fee for managing the fund.

Investor #2 invests $5,000 per year in an index fund which mimics the S&P 500 and comes with a 0.1% expense ratio.

If both investors garner a 10% annual return over the course of 40 years, Investor #1 ends up with $1,689,412.23 while Investor #2 ends up with $2,212,962.78. That 1% difference in the annual expense ratio each investor pays adds up to a grand total of $523,550.55!

Now, that’s not to say you should always go with the lowest expense ratio. But if you’re going to invest in something with a higher expense ratio, make sure it generates a higher return on investment in order to offset the higher annual cost. Otherwise, you’re shortchanging yourself.

Remember, lowering your costs can help to generate much higher investment returns, but lower costs need to be balanced with an understanding of your investments and the proper management of risk.

For instance, you can lower your operating costs to zero if you buy and sell individual stocks. After all, companies don’t charge you a fee for holding their stock. But with these lower operating costs comes a greater risk if you don’t understand your investments and properly assess the risks, because owning a few stocks leaves you less diversified than owning hundreds or thousands of stocks in a mutual fund or index fund.

Look Out For Yourself

In the end, taking greater control of your investments and lowering your costs is only possible if you make a concerted effort to become and remain an informed investor.

While it’s not realistic or desirable to have everyone pouring over stock market returns and analyzing financial documents, proper Roth IRA investing does require a basic level of knowledge and a minimum amount of research.

Inform yourself. Learn. Otherwise, your investment returns will suffer.

This has been a guest post by Britt Gillette. He is the author of Your Roth IRA, a site solely dedicated to helping you manage and understand your Roth IRA.

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2 Ways To Maximize Your Roth IRA Returns is from Investor Junkie Copyright © Empowering Media, Inc.

1. TD Ameritrade

One of the best mobile trading apps is the one offered by TD Ameritrade. This application provides you with the opportunity to monitor your portfolio from your mobile device. You can get real streaming quotes online, and execute trades from anywhere. This application is easy to use, and intuitive.

2. Fidelity

Fidelity offers access to a number of products for trade via its mobile app. On top of that, you get access to extended hours trading, and international trading — right from your mobile device. Real time quotes, the ability to edit your watchlist, intraday valuations, and other tools are all available from this app.

3. TradeKing

When you use your TradeKing mobile app, you can track your portfolio, including your watchlists. This app is easy to use, offering streamlined account information in the palm of your hand. You can also enter stock and options orders from your mobile device, and check your account activity with ease.

4. E*Trade

The mobile app from E*Trade is a rather powerful one that provides real-time news and quotes, as well as charts. You can trade quickly and easily with an app that fully integrates with your online E*Trade account. On top of that, the app provides you access to the Quick Transfer feature, which quickly moves money between your bank account and your investment account. E*Trade also offers bonuses, including a free phone, or free trades for 60 days, when you open an account with E*Trade.

5. Sharebuilder

If you are using Sharebuilder, you can get easy access to your investment account with the mobile app offered by the company. Detailed stock quotes are available, along with real time news and information. You can trade stocks and ETFs, and even place options orders. It is also possible to instantly transfer money between your bank and investment account. Even if you don’t have a Sharebuilder account, you can use the app to see instant quotes and real time charts.

6. Charles Schwab

You can get your investing and banking in one place with the mobile app from Charles Schwab. You can do your trading, as well as easily transfer money between your Schwab investment and bank accounts. Plus, you can deposit checks using your smart phone. Easy to use, and fully integrated with your accounts, you can keep track of your money from anywhere. It’s worth noting that optionsXpress has become a subsidiary of Charles Schwab.

7. OptionsXpress

Even though OptionsXpress is affiliated with Charles Schwab, it has its own app, and is its own brokerage. The recently upgraded app includes a great user interface that allows you to trade stocks, options, futures, spreads, covered calls, straddles, and married puts. It’s a one-stop for all the more interesting trading opportunities. Access to research, charts, latest news, and the powerful Dragon screener are all included with this app.

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• Fidelity Review – Opening an Online Brokerage Account

7 Great Apps from Online Brokers is from Investor Junkie Copyright © Empowering Media, Inc.

This year Barron’s adjusted their rankings to weigh more with mobile trading. Though if you read last year’s survey, most readers are not frequent traders. So while I think the ability to trade on the go is important, I suspect it’s a nice feature to have but not requirement. How often will you need to make a trade while out to lunch?

Not all of the mobile apps are about making trades. The TD Ameritrade iPhone app is unique in that it allows you to scan UPC bar codes for investment ideas. The iPad apps are especially a great way to sit down at the couch and to do some investment research.

If you are in the market for a new online broker, you might want to pick up a copy of the magazine at your local newstand. There is much more information in the article, and suggest you read it. Though you will need to be a Barrron’s subscriber if you want to read it online.

Best For Long Term Investing

Best For Frequent Traders

Best For Options Traders

Best For International Traders

Best For Novices

Best For In-Person Service

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• SmartMoney 2012 Broker Survey
• How to Choose an Online Broker
• Stock Broker Reviews (Updated 2011)
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Barron’s 2012 Broker Survey is from Investor Junkie Copyright © Empowering Media, Inc.

I personally don’t use margin that often, but my taxable accounts are margin based by default. It doesn’t cost anything additional to setup a brokerage account on margin. I have my accounts setup up with margin just in case I ever have the need to use it. It can be helpful when you’ve sold one stock, and don’t have enough money to cover a new purchase. Otherwise without margin you are forced to wait until the stock sold is cleared, and the money is deposited within your account. This can take a few days for this to occur, and could lose out on an investment opportunity.

Why Use Margin?

Some use margin accounts to borrow money for investments outside of their stock portfolio (ie a downpayment on a house), without having to sell stocks. If planned carefully it can be a wise decision so you don’t have to sell your stock, and pay tax on the capital gains.

Other investors use it as form of arbitrage like Interactive Brokers mentions in their commercials. You borrow at a lower interest rate than the dividend payout rates. There are many dividend aristoctrats higher than Interactive Broker’s margin rates. You pocket the difference between the two.

Is Using Margin Risky?

Leveraging using margin can also backfire on you, if you aren’t careful. You could be forced into a margin call because the stocks you own have decreased in value, and below your margin limit. So you experience double jeopardy, forcing you to sell stocks at the worst time. So it’s critical you don’t leverage too much, if you use margin.

In most cases you are paying for a heavy premium for it. The current Federal Funds Rate is at 0% – 0.25% at least until 2014, and you would expect margin rates would also be low. If you see the table below, most of the brokers make off very well with the interest they charge. The three exceptions to this are: Interactive Brokers, tradeMONSTER, and OptionsHouse with a big deposit amount. It would be very difficult to profit on margin with TD Ameritrade since many dividend stocks and fixed income earn less than 7.00%.

Though not listed on the table, Interactive Brokers offers margin rates below 1.00% for deposit amounts $2,000,000 or greater. I’m assuming this is outside the scope of most investors. If you are ultra high net worth individual, this could be a great way to borrow against your stock assets.

If you do use margin for investing or short term loans, make sure you understand the risks and the costs. Otherwise it could be a costly investment lesson. Depending upon the broker you choose and the amount invested, it might be better to get a short term loan from another source.

Margin Rate Comparison

Margin rates updated May 1st 2012

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• Barron’s 2012 Broker Survey

Best Margin Rates is from Investor Junkie Copyright © Empowering Media, Inc.

1. Gross Profit Margin

A company’s gross profit margin is what the company makes after the cost of goods sold is accounted for. The formula for determining gross profit margin is to subtract the cost of goods sold from the sales, and then divide that number by the sales. If a company has made $10 million in sales, and the cost of goods is $3 million, the profit margin is:

$10 million - $3 million = $7 million. $7 million / $10 million = .70, or 70%.

The higher the gross profit margin, the more liquidity a company has. Gross profit margin can help you understand how well the company uses raw materials and labor in production, and how much cash a company has. A company with a declining profit margin has less cash, and less liquidity. Make sure that the gross profit margin of a company is in line with the rest of the industry.

2. Operating Profit Margin

Rather than just looking at a comparison of sales and the cost of goods, the operating profit margin is a measure of how well a company’s operations lead to profits. The formula for operating profit margin divides a company’s earnings before interest and taxes by its sales. In our example above, a company might have $10 million in sales, but its earnings might be a little different. Perhaps the earnings before taxes and interest are only $4 million.

The operating profit margin takes into account the administration and other costs as well as the cost of goods sold. So, to figure the operating profit margin, you would divide $4 million by $10 million to get 0.40 or 40%. A higher operating profit margin indicates that the company is efficient at managing costs, and that can be a positive sign.

3. Net Profit Margin

When figuring the net profit margin, you divide the net income by the sales of the company. Net income involves the amount of money coming in from all sources, and the costs that offset it. In our example, the company might only have $4.2 million in net income. As a result, the net profit margin would be 42%.

The net profit margin is representative of how managers and operations are doing. You should compare the numbers with other companies in the industry, since it’s unfair to compare companies in different industries too closely. Profit margins for some industries are naturally smaller than those of other industries. You want to compare apples to apples when deciding which companies to invest in.

Bottom Line

A company’s profit margin provides clues about its efficiency, and how it uses its cash and other resources. You’ll want to look at a number of factors, from human capital to revenue to the balance sheet, when deciding on a company, but profit margin is a good place to gain insight as well.

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What Is Profit Margin? is from Investor Junkie Copyright © Empowering Media, Inc.

Fixed Income

On one side you have fixed income investors who are getting no yield because the federal funds rate is set at 0 – 0.25%. The Federal Reserve recently announced this rate will be kept until 2014. The FED started this rate in 2008. So anyone who had a CD ladder for five years more than likely owned 5 year CDs. All of the previously high interest (remember the days of 4-5%+ APR CDs) will be renewed with low rate CDs. This will wipe out savers in this once decent return investment.

A ten year US treasury is currently earning less than 2%, and is less than the current rate of inflation. Five year bank CDs are earning less than 2%. Prudent savers, and retirees are getting pounded. So they have nowhere invest to earn a decent return. You are losing money in real dollars if you invest in these options, because the actual inflation rate is much higher. Savers are forced to invest into risker assets because of FED policy. This is a problem not only because they are risker investments, but also because of drastic tax increases in 2013.

Dividend Stocks

Forget for the moment that dividend stocks are not bonds, because that’s a whole other discussion. This fact hasn’t stopped investors looking for yield in this asset class.

On the other side we have the Obama administration planning to increase tax rates for dividends in the 2013 budget. This isn’t including the Bush tax cuts that are set to expire by 2013. That is an automatic increase, unless Congress intervenes. Since it’s an election year our political leaders will not have the courage to vote on anything before 2013.

It appears we’ll get a maximum 200 percentage point tax increase with dividends from the end of the Bush tax cuts alone. This isn’t including the Obamacare 3.8% increase with families whose overall income is above $250,000 (individuals with income over $200,000). All of this won’t bode well with investors and businesses who payout a dividend.

If you don’t think an increase in taxes won’t effect dividend stocks you’ll be sorely mistaken. History has shown tax increases/decreases affect the S&P 500 dividend payout. It’s predicted we will achieve a record high in dividend payouts this year. I suspect many companies will not increase or drop their dividends after 2012, and will instead favor stock buybacks. Unlike dividends, stock buybacks do not incur taxes for shareholders. By reducing the amount of available shares, the stock price naturally increases. Though stock buybacks aren’t the same as dividends.

This of course doesn’t do any good for a retiree, who’s looking for spendable income. The exception to this rule will more than likely be the dividend aristocrats which have increased dividends for 25 years or more. I suspect even after a tax increase, this group of companies will keep increasing their dividends. This is unlike companies like Microsoft (MSFT), Cisco (CSCO) and Intel (INTC) who’ve recently introduced dividends.

“I am more concerned about the return OF my money than the return ON my money.” – Mark Twain

Obviously Mark Twain never lived in this economic environment. We aren’t getting a return on my money, nor are getting a return of my money, as least in terms of real dollars.

Nowhere to Hide?

So what other options are available to earn a safe return above the rate of inflation, while having gains that offset the tax increases? Unfortunately the options are slim, and in many cases are currently fully valued. The options are:

• MLPs – In taxable accounts
• REITs – Placed of course in tax differed accounts
• Corporate Bonds
• Muni Bonds
• TIPs and I – Bonds
• Peer-to-peer lending – For example Lending Club, which unfortunately is taxed as ordinary income but offers a higher rate of return.
• Debt prepayment – I consider this the last resort, but at this point might be an investor’s best return

I certainly don’t consider treasuries, bank CDs, and dividend stocks a good investment right now. Because of low bond returns, many investors have already piled into dividend stocks. That ship sailed in 2009 and 2010. I’m personally having a hard time finding any good stock values.

Readers: What do you think are viable options to invest in not only a low interest rate environment, but also a increasing tax rate for dividends?

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• 2012 Dividend Aristocrats
• Could Disney Make a Good Addition to Your Income Portfolio?
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Press Your Luck With Dividend Stocks or Fixed Income is from Investor Junkie Copyright © Empowering Media, Inc.

The popular saying in poker is “if you don’t know who’s the patsy at your table, then it’s you”, applies to buying Facebook (FB) at this stage of the game. Take it from someone who worked for a start up during the dot bomb days. Commerce One (CMRC), or Commerce None as I aptly call them since they are out of business, was one of the biggest IPOs during the 90′s. I’m not saying Facebook is the same as Commerce One, but implying who are the ones making money by going public.

The ones making money off Facebook are the ones who had an early stake in the company. It’s the founders, early investors, employees, and underwriters who are minting money. They are cashing out of their investment, and who could blame them. The social media space is currently very hot with investors.

It’s been estimated Facebook will be worth $100 Billion at the time of their public offering. Is Facebook really worth 100 times, taking into account their last year revenue of $1 Billion? Let’s even double it and assume this year they grow 100%, and generate $2 Billion annually, or 50 P/E ratio. Is Facebook worth that amount?

As I’ve mentioned in a previous post, there are really only two factors when considering investing in a company. To recap:

1. Is the stock cheaply priced?
2. What’s the prospect of future growth for the company in the next five to ten years?

Facebook definitely fails with test #1, and it’s future growth is also questionable. Though I do think it grow faster than the average S&P 500 company. I do not think it’s worth 100 times current annual earnings. Mind you, in the short term the stock could do very well. Mr. Market can stay irrational for a very long time. What I’m saying is the fundamentals aren’t there to support the price.

Henry Blodget of Business Insider (yes the same guy who stated Amazon was a $300/share stock in the 90′s), has a fair and balanced article on what the real valuation of Facebook should be.

Facebook revenue is primarily adverting based, and relies on a very fickle audience. Anyone remember MySpace? Facebook is the AOL of this era. Facebook’s user base growth has been outstanding where it’s been reported over 600 million users. The problem is at that huge base it will likely not grow much more. Instead Facebook must focus increasing the revenue per user, which isn’t an easy feat.

So while I think Facebook is a great company, and personally use the service myself, you will not find me investing in it. That time has come and gone, and you should have been done via the secondary market a few years ago. Employees of Facebook were selling their shares on some of the private exchanges. It was a very “public” company when still being private. So if you invest in Facebook now, you’re the patsy. Facebook is a trade, not an investment at it’s IPO price. There are currently better tech companies with well established histories and at much cheaper valuations.

Readers: What do you think of Facebook as an investment? Do you think my assessment of Facebook is wrong?

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You’re A Patsy If You Buy Facebook’s IPO is from Investor Junkie Copyright © Empowering Media, Inc.

Before you sign up for an online broker, though, make sure you do your research. Consider your personal needs and investing goals and choose a broker that is likely to provide you with the best service for you.

Things to Look for in an Online Broker

As you make your decision about an online broker, consider what the broker has to offer, as compared to others. Here are some items to pay attention to:

• Investment Choices: Your first consideration should be the investment choices offered. Does the broker offer what you are looking for? Stocks, bonds, various funds (including ETFs) and other assets should be considered. There are some brokers that offer currencies and that offer futures and options. You can also find many brokers that can help you open an IRA or other type of retirement account. Figure out what investment options you want, and look at brokers that offer what you want.
• Costs: Different online brokers have varying fee structures. Find out about the commissions, the flat-fees for trades, and other costs. Some of these costs include extra fees for trading funds, getting phone advice, and more. You want to choose an online broker that is going to provide you with good value, with lower costs.
• Research Tools: Understand what tools are available with your broker. You might be able to access additional tools with a “premium” account that costs extra. Or, you might find that the free tools are sufficient. Go through the research tools and choose an online broker that provides you with the information you need to make informed decisions.
• Customer Service: Even though your investment choices and the costs you pay might be the most important points to you, don’t forget to consider customer service. Read reviews of different online brokers to get a feel for how well they serve customers. Also, you can look for items such as phone help, and 24/7 online chat. You want to ensure that you will be able to get the help you need with your broker.
• Other Perks: Consider the other perks that an online broker might offer. Some of these perks might include banking services (including an ATM card to access your cash account). Look at all that the online broker has to offer, and whether or not you require it.

Figure out which items are most important to you, and which you are willing to be flexible on. No online brokerage is going to be ideal for everyone, so you will need to prioritize the characteristics that are most important for you. You might be willing to pay a little more for a wide variety of investment options and first-class customer service. Or, if you are more of a do-it-yourself investor with basic needs, something with rock-bottom prices and basic investment choices might work best. When ready to sign up, visit our stock broker promo codes section. We are constantly updating the promotions offered.

The important thing is to understand what you want in an investment broker, and then compare your options so that you get will be the best value in your situation.

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• TD Ameritrade Review – The Perfect Online Broker?
• Stock Broker Reviews (Updated 2011)
• Barron’s 2012 Broker Survey
• Barron’s 2011 Broker Survey
• SmartMoney 2012 Broker Survey

How to Choose an Online Broker is from Investor Junkie Copyright © Empowering Media, Inc.

How Does Morningstar Figure Its Ratings?

Funds with a three year history all have ratings ranging from one star (lowest) to five stars (highest). In order to determine its star ratings, Morningstar looks at risk-adjusted trailing performance. As part of the formula, Morningstar does include costs, considering returns that come after fees are deducted. However, the fact that past performance is a huge part of Morningstar’s rating system means that there is a big problem with how meaningful the ratings actually are.

Past Performance and Future Results

Investors are familiar with this common chant: “Past performance does not guarantee future results.” This means that it becomes necessary to ask yourself how meaningful a star rating system based on what has happened in the past is. If past performance can’t be taken as an indicator of future results, Morningstar ratings based on these performances might not be as meaningful as expected.

It is true that past performance can provide clues about a company, and its likely health. From that standpoint, looking into the past isn’t a bad idea. But relying heavily on Morningstar ratings to help you choose a fund that will perform in the future might not be in the best interest of your investment portfolio.

Could Expense Ratios Be More Meaningful?

Instead of relying on Morningstar ratings, you might actually be better off checking into expense ratios. In 2010, Russel Kinnel, Morningstar Director of Research, actually addressed the issue of star ratings vs. expense ratios (you need a Morningstar free membership to read it). He basically hedged on the usefulness of the ratings from Morningstar, and pointed out that expense ratios offer a better gauge of how a fund is likely to perform in the future.

The problem is that many funds, especially index funds, are going to deliver average returns when compared to the market. A lower cost fund, therefore, provides you with the best chance of doing well. When shopping around for a fund, therefore, you might be better off taking a look at the expense ratios, and not paying as much attention to what star rating Morningstar provided.

Bottom Line

Morningstar’s ratings can provide you with helpful information about a fund, and can be one of the tools that you use when considering where to put your money. However, it’s a mistake to put too much faith in Morningstar ratings. They are not as meaningful as Morningstar — and the funds that tout their four and five star ratings — would have us believe.

Use Morningstar ratings as one indicator in selecting a fund. Don’t forget to look for other variables, including expense ratios, fund management, underlying investing methods, and economic factors. Not withstanding, Morningstar’s premium membership is still very useful. It has a 10-year performance history and many tools that can be used in aiding your investment decsions.

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• Morningstar Review – Premium Membership
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• Mutual Funds vs. ETFs
• My WTF Fund

Morningstar Ratings — Are They Meaningful? is from Investor Junkie Copyright © Empowering Media, Inc.

In recent years exchange-traded funds (ETFs) have increased in popularity. These investments are collections of shares in multiple investments, but, unlike mutual funds, ETFs can be traded fairly easily on stock exchanges. ETFs are generally low-cost, and many consider them an easy way to diversify easily while maintaining the ability to easily carry out stock-like transactions.

ETFs aren’t limited to stocks, either. There are ETFs that include a wide range of investments. You can find bond, currency and commodity ETFs without too much trouble. However, when you start getting into ETFs that contain more complex investments, such as commodities or leveraged ETFs, you run into some very interesting issues.

ETFs and Contango

Investing in commodities can provide you with diversity, and add an element of growth to your portfolio. Plus, commodity ETFs get rid of some of the complexities that come with dealing with a futures account. Commodity ETFs have made commodity investing more accessible to more people. However, the fact that these ETFs are dealing in futures means that there are some issues that need to be addressed.

Perhaps the biggest issue with investing in commodity ETFs is contango. Contango is an issue that comes into play with any investment that is futures-based. Contango is a situation in which the near-month futures are actually less expensive than those that expire later on. As a result, when the roll process is underway, it can easily result in selling low and buying high. This is a situation that investors don’t want to be in, since it means losses.

Contango becomes more obvious when investing with leveraged ETFs. Leveraged ETFs are ETFs that are designed to magnify gains or losses compared to an index. So for example, if you invest in ProShares Ultra S&P500 (SSO) it’s designed to give 2x return of the underlying S&P 500 index. The issue is this: Every day the indexing is reset since the ETF is futures based. Over time your returns do not match S&P 500 multiplied by two. Because of this, a leveraged ETF should only be used as short term (a few weeks) investment.

When it comes to commodity ETFs, contango can be an issue also. When you compare a contangoed ETF to the spot prices of the commodities involved, you might find an unfavorable situation. Over time, if the commodity contracts underlying the ETF are exhibiting contango, eventually the ETF loses value. And the situation continues — with your commodity ETF’s value being eroded — as long as there is contango in the commodities.

Paying Attention

While ETFs make it easier to invest in a variety of asset classes, using an ETF does not release you from your obligation to pay attention to what is happening with your investments. It also doesn’t release you from the obligation to understand investments before you put your money in. Before you invest in a commodity ETF — or any ETF — you should not only understand how ETFs work, but also know how the underlying investments function.

Before you invest in a commodity ETF, you should know how commodities contracts work. You should understand concepts related to the futures market. Consider ETFs as futures investments, and not just as a clever way to trade commodities as if they are stocks. It’s important that you consider the fact that, as underlying investments become more complicated, so, too, do ETFs. While ETFs can be valuable tools, and help you add diversity to your portfolio, you should remember that they are not completely safe, and investing them won’t protect you from what is happening with the underlying investments.

Related posts:

• Fidelity Commission Free ETFs
• optionsXpress Merges with Charles Schwab

What is ETF Contango? is from Investor Junkie Copyright © Empowering Media, Inc.

Why Active Investing?

Let me first state our portfolio isn’t mostly active stock picking. It is actually quite the opposite. My family has most (over 80%) of our investments in passive indexed based funds. It’s actually quite boring. Our asset allocation will always remain that way. I’ll only adjust asset allocation percentages as we increase in age, or feel a need to stabilize future returns based upon new research data I’ve read.

I’ve designed our asset allocation in case we cannot do beat the averages. Our active investments it will not dramatically hurt returns. Yet it is also possible to get some alpha by actively picking stocks. A completely passive portfolio does not have this option. Like what we saw for the past ten years where the S&P 500 was flat, so would your portfolio.

Another way to look at our investment strategy is I’m hedging my bets between passive investing and active investing – favoring the belief of passive investing works better.

Quite honestly, the other aspect of stock picking is it’s an active hobby for me, and one of the primarily reasons I created this investing blog. It gives me something to do than with a completely passive stock portfolio. To me a passive portfolio is like watching the grass grow. My investment strategy does introduce some increased risk with our portfolio, but with the potential for a higher rate of return. As long as you know and understand this, you should be ok for some part of your portfolio for active investing. The only way to increase your wealth is by increasing risk, though not by betting the farm.

Learn To Become A Better Investor By Shopping

I say to become a better investor, you should first learn how to be a better shopper. I mean this quite literally. When shopping for consumer goods or at the supermarket, would you overpay for something knowing you could get it somewhere else cheaper? I actually find it pretty amazing that people will trample over each other to save a few dollars during black friday, yet run away in fear when stocks tank. Mark Cuban stated right now middle class individuals should focus on saving money when shopping than the low returns they are getting in the market. I somewhat agree with this statement, but feel now’s the time to also become an expert shopper in the stock market.

Learn what’s a good price for the products you buy on a weekly basis. Learn when something is a good deal, or when it isn’t. If you believe in value investing, then you should understand when a stock is a great price, and when it’s expensive. Using Warren Buffett’s analogy to baseball, only take swings at stocks you like. For the individual investor, unlike the professional, there is no pressure you must buy a stock.

As a kid I always loved watching the game show Price Is Right, especially the game Cliff Hangers. How many times have you watched the show, and a contestant doesn’t understand how to play the game? While this is happening you are yelling at the TV? I know I have on a number of occasions. Be it in the game Beat the Clock, or when on contestants row not outbidding the others by a dollar? Many people don’t study how to be good shoppers of consumer goods, so it doesn’t surprise me that most aren’t good at investing.

What’s The Two Factors For Value Investing?

In my mind, value investing really comes down to understanding only two aspects. When investing in a stock I ask these two questions:

1. Is the stock cheaply priced?
2. What’s the prospect of future growth for the company in the next five to ten years?

Everything else is secondary. While there are many quantitative data to help determine the answers to these questions, it all boils down to these two questions. Only having one of these factors when stock picking you might do ok, but having both is critical for good long term investing success. Is the stock a good value?

The important aspect when buying a product is are you getting the best value for your money. Notice I didn’t say the cheapest price. This philosophy also applies to investing. Would you buy a stock that’s priced expensively because everyone else is rushing into that stock? Technical trader do, but I think it’s silly way to look at the stock market by a rearview mirror. Would you buy a stock that has no growth prospects yet is cheap? For me, the answer is a resounding no on both counts.

For example, Microsoft’s (MSFT) stock price (not including dividends) has basically gone nowhere in the past ten years. Some value investors say Microsoft is a great deal, and should be picked up. I agree it’s priced cheaply. In my opinion the prospects for future growth are weak at best unless there is some massive leadership changes. I believe Microsoft has a leadership issue, and has it’s hands in too many low/no profit buckets. Microsoft has lost it’s way, and has missed many technology paradigm changes. Unless those factors change, I will not invest in Microsoft.

On the other hand, Apple’s (AAPL) stock has recently been valued cheap. But it’s growth prospects are much greater than Microsoft. This is even including the many headwinds it will experience in the next five – ten years:

• The passing of Steve Jobs. Will the current CEO or future CEOs be as iconic and a strong leader to help push innovation?
• Will Google’s (GOOG) Android operating system become the Microsoft Windows of smart phones killing into Apple’s profit margin?
• Can Apple keep it’s large profit margins?
• Will Apple continue to grow (though definitely slower)?
• Has Apple tapped out it’s growth with existing products?
• Will Apple continue to innovate with new products and in new categories?

I believe all of these factors are still positive for the company. I’ll continue to keep my Apple shares. For me, I will only sell Apple when these factors become a major detriment for the company.

In Summary

So when it comes to value investing, know when a stock is a good deal and it’s future prospects for growth.

Disclosure: I own shares of AAPL.

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• 7 Great Apps from Online Brokers
• Lending Club Investor Promotions (Updated 2012)
• Technology is Great, Unless It Doesn’t Work

How Do You Become A Great Investor? Learn How To Shop! is from Investor Junkie Copyright © Empowering Media, Inc.

Reinvesting Your Dividends

Companies that offer DRIPs allow you to, instead of receive a check for your dividends, automatically use the money to buy more shares. If you own a stock that pays 20 cents a share each quarter, and you own 100 shares, that’s $20 each quarter. Without a DRIP, you get that $20, and you have to decide what to do with it. If you decide to invest it, though, you will likely have to pay a transaction fee.

If you are signed up for the company’s DRIP, that $20 buys more shares in the company automatically. If the stock price is $15 a share, instead of getting a check for $20, your dividend payout is used to automatically purchase another 1.33 shares of the company’s stock. Most of the time, shares bought with reinvested dividends don’t come with transaction fees. Even many online brokers won’t charge you fees for reinvesting dividends.

Over time, these extra shares can add up. As you acquire more shares, your dividend payout increases as well. DRIPs allow you to boost your payout. In our example above, the next quarter you now have 101.33 shares to base the payout on, so that now you get $20.27, and you can purchase 1.35 more shares (if the price hasn’t changed from $15), bringing your total to 102.68 shares, with your reinvested dividends.

While it seems like a small difference now, the cumulative effects can be much bigger. You are constantly buying shares, which increases the amount of money you receive in dividend payouts. Plus, you are building your portfolio up with very little effort. Later, if you decide to sell some stock, you will have more shares that you can sell at a (hopefully) higher price. All the way around, DRIPs can help you maximize your dividend investing efforts.

How to Start DRIP Investing

Find out if the company of interest to you has a DRIP plan. Many dividend paying companies offer some sort of plan. You can contact the company for information. You will either be directed to an in-house representative who can set you up, or you will be directed to a transfer agent who handles multiple company DRIPs. You can also go directly to a transfer agent for a list of companies it manages DRIPs for. It is also possible to check with your broker to become involved in DRIP investing.

Related posts:

• What is DRIP Investing?
• Could Disney Make a Good Addition to Your Income Portfolio?
• Press Your Luck With Dividend Stocks or Fixed Income
• Added More Exxon Mobil (XOM) To My Portfolio
• What Is Arbitrage?

What are DRIPs? is from Investor Junkie Copyright © Empowering Media, Inc.

2011 Results

As of January 5th 2012 I am up 14.5% from my initial $10,000 investment, mostly because of owning Apple (AAPL). The account is now currently worth $11,454.92. I sold my shares of Cisco (CSCO) in July at a loss of 16.84%. If I still owned the stock today, I still would be negative even after dividends.

Investments

I traded only Apple during the remaining part of the year. Since last year the stock market was very volatile, and I was able to buy more shares during the dips. Apple is $10,450.75 of the fund. The remaining $1,004.17 is in cash.

I believe Apple has much more room to grow, though at a slower pace. Not including the $82+ Billion they have in the bank, their forward P/E is 10.7. This is almost unheard for a tech stock like Apple. With the passing of Steve Jobs, this is a critical year for Apple to prove themselves in the post Jobs era.

Many fear Apple will languish without Steve’s persona, and perform like they were during the 90′s. Apple is a much different company since then. Not only do they have a very capable management team on board, their existing and planned products should last at least for the next 3-5 years. Apple isn’t going anywhere, and at worst case will coast along. Though many would love to be like Apple, and exist with the profit margins and cash flow they have. I plan to own the stock at least this year, and more than likely at least the next 3 – 5 years.

Keep in mind their competitors like Amazon (AMZN) or Google (GOOG) are not keeping idle. Although it seems they are creating some neat technology, they still have the issue of the fat profit margins Apple creates. The competitors, while can replicate just about everything technical, they just can’t seem to replicate their profits, the Apple ecosystem, and marketing buzz.

A perfect example of this is Amazon’s Kindle Fire. At $200 a pop, they have a very slim profit margin, and it’s rumored they are selling at a minor loss. Amazon (like Gillette) hopes to make up for the difference in the “razor blades” they sell.

I bought the Kindle Fire for my mother for Christmas. It’s great for someone who needs an electronic reader, but ok for other functions. It lacks the finesse of Apple’s iOS. I still see the Kindle line as primarily e-readers, with some lite web surfing or E-mail reading. While it no doubt will eat into Apple’s sales, I don’t see it affecting consumers who need the full features of an iPad. Keep in mind also it’s rumored that the iPad 3 will soon come out, and the iPad 2 models will be sold at a discount. If Apple sells the lowest iPad at $300, I can see how buyers could easily justify the $100 more to buy the iPad instead.

Future Plans

I currently have a open order to buy Oracle (ORCL) at $25/share. I just missed that price point a few weeks ago, and kicking myself because the price Oracle is now at $25.50/share. I am seeing many technology companies fitting the value investment profile. Which is great for me since I’m a value investor, and a lover of technology. I’m on the hunt this year, and hope to find some good stock deals. Oracle is one of them.

Funds at the moment are little tight, and want to fully fund retirement and 529 accounts first. I do plan on adding additional $10k to this fund sometime this year. In the mean time will investigate possible stocks to purchase.

Related posts:

• WTF Fund (April 2011 Update)
• My WTF Fund
• Sold Some Apple Shares Today
• Weekend Reading for August 26, 2011
• Lending Club (July 2011 Update)

2011 WTF Fund Update is from Investor Junkie Copyright © Empowering Media, Inc.

For the investor, there are two main ways to include real estate in a portfolio: REITs and direct investment in real estate.

What are REITs?

Real Estate Investment Trusts (REITs) are traded like stocks on the market. They are collections of real estate related assets. They might include residential, commercial, industrial or agriculture real estate. Some REITs include storage units, or mortgages, or malls, or a mix of investments.

The idea is that you have exposure to real estate without actually owning, directly, the property. (The discussion about whether REITs actually represent “owning” real estate, rather than just owning a stock, is one for another day.)

For those who want exposure to real estate, but don’t have the capital for direct investment, REITs can be a reasonable choice for a financial plan. There are REITs that provide you with the ability to diversify across property type, geographic location, and more. Plus, there are REITs that pay dividends, so they can included in income portfolios.

Liquidity can also be an issue. Because traded REITs (make sure you know the difference between traded and non-traded REITs) can be bought and sold like stocks, they are fairly liquid — unlike direct real estate, which can be difficult to sell quickly if you decide you need to. However, at the same time you do run the risk of losing quite a bit of money if the manager makes a poor decision, or if some of what’s in the REIT tanks.

The other aspect of REITs over owning real estate is taxes. Based upon the way they are taxed, REITs are best suited to be placed in retirement accounts. Though there is nothing preventing you from investing in REITs in taxable accounts.

Directly Owning Real Estate

Direct investment in real estate does have some advantages, though. If you can put down a decent down payment, and you have the ability to manage the real estate effectively (or hire someone else to manage it), direct rental property can be a great asset. It is usually best to think of owning a rental property as an investment and business. It’s not truly passive compared to owning a REIT, but the amount of direct work can be minimized.

When you own a property, you have more control over of the investment. Additionally, you have something physical to fall back on. Even if the market tanks, and the property loses financial value, the fact that you still have a tangible asset that you could live in (or on in the case of farmland), or use in some way, remains. As long as the property has tenants, you have a monthly income.

On the down side, though, directly owning real estate means you are responsible for it. You are in charge of addressing tenant problems, and you have to deal with trying to collect rent, and choose tenants that aren’t going to destroy your property or rip you off. (One way to avoid this is to invest in land that is just sitting there, and that you don’t expect income from right away.)

Which is Better?

Investing in REITs and direct investment in real estate both come with advantages and disadvantages. In the end you have to weigh the options and decide which better fits your style. Some investors prefer a mix of REITs and directly owned real estate. Others prefer one type over the other, for whatever reasons. Before you invest, though, make sure you know what you are doing, and understand the risks.

Related posts:

• REIT (Real Estate Investment Trust) Investing
• 1031 Exchange Rule – How To Use In Real Estate Investing
• Investing In A Rental Property
• Investing Internationally – How to Get the Best Results
• Peak Oil – Is It A Real Problem?

REITs vs. Real Estate Investing is from Investor Junkie Copyright © Empowering Media, Inc.

The move brings Disney’s yield up to 1.6% — and it’s only an annual dividend, so many think that the stock doesn’t make a good choice for an income portfolio. And, in a sense, this might be the right assessment. However, when building a successful long-term portfolio, sometimes a huge income in the form of dividends isn’t the only thing to consider.

Is Disney a ‘Buy’ Right Now?

Even though dividend payout is somewhat lackluster, especially if you’re aiming for the 3% to 6% yield target that results in a more stable income, it doesn’t mean that a company like Disney would be a bad addition to your portfolio. After all, some thing that it’s a good deal right now. Lawrence Meyers, at InvestorPlace, offers this analysis of DIS:

If we put an 15 P/E on Disney, then, on projected 2015 earnings of $4.43 per share, and factor in 1.2% compounded dividend yield reinvested, we get a price target of $72. That’s an amazing total return of 120% from here, suggesting Disney falls into the category of both a value and a growth stock.

It’s an interesting analysis, and there might be other companies in a similar position to Disney right now. If it’s a good deal, you could buy now, and receive a little bit of income from the dividends in the interim, waiting for Disney stock to rocket higher. However, holding on to the stock might make it more valuable in the long run – if it really does appreciate as some expect.

Adding a few such investments to your portfolio might make sense, since they can be sold later for higher profits. And, of course, along the way you can see some addition to your income.

A dividend says a lot about a company, and the big Disney increase could be seen as an indication that Disney feels secure in its situation. The fundamentals at Disney, with its various entertainment properties, appear to be strong. Even the stinker that was Cars 2 doesn’t seem to be causing a lot of problems for the company. After all, it’s got Marvel and ESPN and a number of other popular shows.

So, even though income is important to an income portfolio, it’s worth considering companies that will provide earnings down the road. Disney just might be one of them.

Related posts:

• Preparing Your Portfolio for the End of the Year
• Press Your Luck With Dividend Stocks or Fixed Income
• Added More Exxon Mobil (XOM) To My Portfolio
• Is Lending Club No Longer a Good Investment?
• Is Buying A Franchise A Good idea?

Could Disney Make a Good Addition to Your Income Portfolio? is from Investor Junkie Copyright © Empowering Media, Inc.

What is the Wash Sale Rule?

One of the tempting ideas that many investors have is this: Sell a stock, lock in the capital loss for tax purposes, and then turn around and buy that stock again at the low price. You’ve got a great deal, since the stock might run up again, and you’ve locked in losses. It seems like a great plan, but the IRS is already ahead of you. When you follow this path, it’s considered a wash sale.

The IRS wash sale rule stipulates that you can’t repurchase a “substantially identical” security within 30 days and be able to use the capital loss to your tax advantage. So, if you sell your stock for the loss, you won’t be able to use the loss to offset your capital gains and/or income if you repurchase within 30 days. Before you sell a stock, make sure that you are willing to wait the 30 day period before buying it again if you plan to use the loss to your advantage.

What Is a “Substantially Identical” Stock?

Obviously, you can’t repurchase the same investment if you don’t want to run afoul of the IRS wash sale rule. But what about other definitions of “substantially identical?” The IRS isn’t terribly forthcoming, but there are some things that you can keep in mind.

You can actually buy a new stock in the same sector. Just because you sold Coke doesn’t mean that you can’t buy Pepsi within the 30 day period. This is a strategy that some employ; they sell for a capital loss, and then buy something else in the same industry — something that is likely (but not guaranteed) to move in the same direction as the stock you just sold.

However, it is important to realize that you might not have the same luck if you decide to buy stock in a company that plans to buy the company whose stock you just sold. The IRS considers that if one company’s stock performance is linked in a direct way to another’s they are “substantially identical.” A merger between two companies means that the price of one is reflected in the price of another. For the IRS, that’s enough to be considered “substantially identical.” Buying the company could mean a wash sale in the eyes of the IRS.

Mutual funds are a bone of contention. However, to be on the safe side, my accountant recommends that you not purchase index funds pegged to the same index within 30 days after selling a loser. So, if you sold a loser pegged to the Russell 2000 from one broker, you might reconsider before going to a new broker and buying Russell 2000 at a bargain price. (It is worth noting that some think that a managed fund and an index fund would not be considered “substantially identical.”)

Bottom Line

As you prepare to sell stocks at a loss, make sure you understand the wash sale rule — and make sure that you are prepared to avoid buying what you just sold for at least 30 days.

Related posts:

• Is E*Trade Up For Sale?
• 1031 Exchange Rule – How To Use In Real Estate Investing
• The 4% Rule to Investing
• When Should You Sell A Stock?

What Is The IRS Wash Sale Rule? is from Investor Junkie Copyright © Empowering Media, Inc.