Investment Vehicles Articles

Cheat Sheet / Updated 01-06-2023

Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting — so you can earn profit even when stocks fall.

Cheat Sheet / Updated 11-08-2022

Listen to the article:Download audio You're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the online resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any company's stock.

Article / Updated 10-06-2022

Established in 1848, the Chicago Board of Trade (CBOT) used to be the oldest commodity exchange in the world. The CBOT was the go-to exchange for grains and other agricultural products, such as oats, ethanol, and rice. The exchange also offered several metals contracts targeted at individual investors, including the mini gold and mini silver contracts. In 2007, the Chicago Mercantile Exchange (CME) merged with the CBOT as part of a great consolidation wave. CME rolled up the CBOT's popular grain contracts and now offers them on its electronic platform. Many traders still refer to some of these contracts as CBOT grains. CME is the largest and most liquid futures exchange in the world. The CME has the heaviest trading activity — and open interest — of any exchange, partly because of the depth of its products offerings. Besides agricultural commodities, it trades economic derivatives (contracts that track economic data such as U.S. quarterly GDP and nonfarm payrolls), foreign currencies (it offers a broad currency selection, ranging from the Hungarian forint to the South Korean won), interest rates (including the London Inter Bank Offered Rate, the LIBOR), and even weather derivatives (contracts that track weather patterns in various regions of the world). Because of its broad products listing, the CME is perhaps the most versatile of the commodity exchanges. In addition, the CME was one of the first exchanges to launch an electronic trading platform, the CME Globex, which became an instant hit with traders. It now accounts for more than 60 percent of the exchange's total volume. In 2006, the New York Mercantile Exchange (NYMEX) entered into an agreement with the CME to trade its marquee energy and metals contracts on Globex, an electronic trading system. In 2008, the CME went on a series of acquisitions and purchased the NYMEX and COMEX. The CME is also the first exchange to go public. Investors greeted the initial public offering with enthusiasm, raising the stock from $40 in 2003 to more than $500 in 2006. For more on the CME, check out its website, which also includes helpful tutorials on all its products.

Article / Updated 09-29-2022

People who invest online are usually do-it-yourself investors. This means they're probably working without a tax consultant. But this can make it hard to understand how the money they earn while investing is taxed. That's where understanding capital gains taxes enters the picture. When you sell a stock held in a taxable account that has appreciated in value, you usually have taxes to pay. Generally, such capital gains taxes are calculated based on the holding period. There are two holding periods: Short-term: That's the type of capital gain you have if you sell a stock after owning it for one year or less. You want to avoid these gains if you can because you're taxed at the ordinary income tax rate, which, as I explain shortly, is one of the highest tax percentages. Long-term: That's the type of capital gain result you get if you sell a stock after holding it for more than one year. These gains qualify for a special discount on taxes. You must own a stock for over one year for it to be considered a long-term capital gain. If you buy a stock on March 3, 2019, and sell it on March 3, 2020 for a profit, that is considered a short-term capital gain. Also, an important thing to remember is that the holding-period clock starts the day after you buy the stock and stops the day you sell it. Selling even one day too soon can be a costly mistake. If you're interested in cutting your tax bill in a taxable account, you want to reduce, as much as possible, the number of stocks you sell that you've owned for only a year or less because they're taxed at your ordinary income tax levels. You can look up your ordinary income tax bracket at this Internal Revenue Service website. Need an example? Say a stock rose from $10 to $100 a share (for a $90 per share gain). Say that you had $50,000 in taxable income that year and sold the stock after owning it for just three months. Your gain would fall from $90 to $67.50 after paying $22.50 in taxes. By owning stocks for more than a year, gains are taxed at the maximum capital gain rate. The rate you pay on long-term capital gains varies based on your normal tax bracket, but such rates are almost always much lower than your ordinary income tax rate, if not zero. Yes, zero — some investors' long-term capital gains are tax free! Long-term capital gains rates, though, can change dramatically due to political pressure. The following table shows the maximum capital gain rates for 2009 and 2010 for typical investments such as stocks and bonds. Maximum Capital Gain Rate If Your Regular Tax Rate Is Your Maximum Capital Gain Rate Is Greater than 35% 20% 25% or higher 15% Lower than 25% 0% Source: Internal Revenue Service

Article / Updated 09-29-2022

A stop-loss order (also called a stop order) is a condition-related order that instructs the broker to sell a particular stock in your investment portfolio only when the stock reaches a particular price. It acts like a trigger, and the stop order converts to a market order to sell the stock immediately. The stop-loss order isn’t designed to take advantage of small, short-term moves in the stock’s price. It’s meant to help you protect the bulk of your money when the market turns against your stock investment in a sudden manner. Say that your Kowalski, Inc., stock rises from $10 to $20 per share and you seek to protect your investment against a possible future market decline. A stop-loss order at $18 triggers your broker to sell the stock immediately if it falls to the $18 mark. If the stock suddenly drops to $17, it still triggers the stop-loss order, but the finalized sale price is $17. In a volatile market, you may not be able to sell at your precise stop-loss price. However, because the order automatically gets converted into a market order, the sale will be done, and you’ll be spared further declines in the stock. The main benefit of a stop-loss order is that it prevents a major loss in a stock that you own. It’s a form of discipline that’s important in investing in order to minimize potential losses. Investors can find it agonizing to sell a stock that has fallen. If they don’t sell, however, the stock often continues to plummet as investors hope for a rebound in the price. Most investors set a stop-loss amount at about 10 percent below the market value of the stock. This percentage gives the stock some room to fluctuate, which most stocks tend to do from day to day. If you’re extra nervous, consider a tighter stop-loss, such as 5 percent or less. Please keep in mind that this order is a trigger and a particular price is not guaranteed to be captured because the actual buy or sell occurs immediately after the trigger is activated. If the market at the time of the actual transaction is particularly volatile, then the price realized may be significantly different.

Article / Updated 09-15-2022

Bond investing has a reputation for safety, not only because bonds provide steady and predictable streams of income, but also because as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as tax risk. When comparing taxable bonds to other investments, such as stocks, some investors forget to factor in the potentially high cost of taxation. Except for municipal bonds and bonds kept in tax-advantaged accounts, such as an IRA, the interest payments on bonds are generally taxable at your income-tax rate, which for most people is in the 25 to 28 percent range but could be as high as 35 percent . . . and, depending on the whims of Congress, may rise higher. In contrast, stocks may pay dividends, most of which (thanks to favorable tax treatment enacted into law just a few years back) are taxable at 15 percent. If the price of the stock appreciates, that appreciation isn’t taxable at all unless the stock is actually sold, at which point, it’s usually taxed at 15 percent. So would you rather have a stock that returns 5 percent a year or a bond that returns 5 percent a year? From strictly a tax vantage point, bonds lose. Paying even 25 percent tax represents a 67 percent bigger tax bite than paying 15 percent. (Of course — getting back to the whims of Congress — these special rates are also subject to change.) Tax risk on bonds is most pronounced during times of high interest rates and high inflation. If, for example, the inflation rate is 3 percent, and your bonds are paying 3 percent, you are just about breaking even on your investment. You have to pay taxes on the 3 percent interest, so you actually fall a bit behind. But suppose that the inflation rate were 6 percent and your bonds were paying 6 percent. You have to pay twice as much tax as if your interest rate were 3 percent (and possibly even more than twice the tax, if your interest payments bump you into a higher tax bracket), which means you fall even further behind. Inflation is not likely to go to 6 percent. But if it does, holders of conventional (non-inflation-adjusted) bonds may not be happy campers, especially after April 15 rolls around.

Article / Updated 09-14-2022

Bond investing has a reputation for safety not only because bonds provide steady and predictable streams of income, but also because as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as downgrade risk. Even if a bond doesn’t go into default, rumors of a potential default can send a bond’s price into a spiral. When a major rating agency, such as Moody’s, Standard & Poor’s, or Fitch, changes the rating on a bond (moving it from, say, investment-grade to below investment-grade), fewer investors want that bond. This situation is the equivalent of Consumer Reports magazine pointing out that a particular brand of toaster oven is prone to explode. Not good. Bonds that are downgraded may be downgraded a notch, or two notches, or three. The price of the bond drops accordingly. Typically, a downgrade from investment-grade to junk results in a rather large price drop because many institutions aren’t allowed to own anything below investment-grade. The market therefore deflates faster than a speared blowfish, and the beating to bondholders can be brutal. On occasion, downgraded bonds, even those downgraded to junk (sometimes referred to as fallen angels), are upgraded again. If and when that happens (it usually doesn’t), prices zoom right back up again. Holding tight, therefore, sometimes makes good sense. But bond ratings and bond prices don’t always march in synch. Consider, for example, that when U.S. Treasuries were downgraded by Standard & Poor’s in 2011 from an AAA to an AA rating, the bonds did not drop in price but actually rose, and rose nicely. Why? In large part, it was because of the credit crisis in Europe and the realization of Japan’s rising debt. In other words, although the United States appeared to be a slightly riskier place to invest vis-à-vis other nations, it actually started to look safer.

Cheat Sheet / Updated 09-01-2022

If you want to invest in bonds, you need to know how to read the bond ratings that the big three rating companies use and how to figure whether a taxable or tax-free municipal bond is the better investment. Knowing the right questions to ask about a bond can save you money, and you can find answers to many of those questions on the Internet.

Article / Updated 08-17-2022

Buying and selling an exchange-traded fund (ETF) is just like buying and selling a stock; there really is no difference. Although you can trade in all sorts of ways, the vast majority of trades fall into these categories: Market order: This is as simple as it gets. You place an order with your broker or online to buy, say, 100 shares of a certain ETF. Your order goes to the stock exchange, and you get the best available price. Limit order: More exact than a market order, you place an order to buy, say, 100 shares of an ETF at $23 a share. That is the maximum price you will pay. If no sellers are willing to sell at $23 a share, your order will not go through. If you place a limit order to sell at $23, you’ll get your sale if someone is willing to pay that price. If not, there will be no sale. You can specify whether an order is good for the day or until canceled (if you don’t mind waiting to see if the market moves in your favor). Stop-loss (or stop) order: Designed to protect you should the price of your ETF or stock take a tumble, a stop-loss order automatically becomes a market order if and when the price falls below a certain point (say, 10 percent below the current price). Stop-loss orders are used to limit investors’ exposure to a falling market, but they can (and often do) backfire, especially in very turbulent markets. Proceed with caution. Short sale: You sell shares of an ETF that you have borrowed from the broker. If the price of the ETF then falls, you can buy replacement shares at a lower price and pocket the difference. If, however, the price rises, you are stuck holding a security that is worth less than its market price, so you pay the difference, which can sometimes be huge. For more information on different kinds of trading options, see the U.S. Securities and Exchange Commission discussion.

Article / Updated 08-16-2022

Using these resources will help you keep up to date on major events that move commodities markets. Although not all of these resources deal specifically with commodities, they are indispensable sources of information because they help you get a sense of where the financial markets are heading. The Wall Street Journal For daily intakes of financial news, nothing beats The Wall Street Journal. If you want to be a successful trader, you need to keep abreast of all the information that’s worth knowing. The Journal does a good job of presenting solid analysis and in-depth coverage of the day’s main events. Its coverage of the commodities markets in its online edition is actually fairly extensive, with interactive charts and graphs for both cash prices and futures markets. Also, keep an eye out for the section “Heard on the Street”. It includes a wealth of information to help you develop winning strategies. Bloomberg The Bloomberg website at is one of the best sources of raw information and data available to investors. Visiting this site once a day keeps you up on important developments in the markets. The website’s commodity section contains comprehensive information on all the major commodities, including regular price updates on the futures markets. If you trade futures, this is an indispensable resource. Nightly Business Report Tune in every weeknight to your local PBS network to watch NBR’s Paul Kangas, Susie Gharib, and the gang analyze the day’s events. Their special features are insightful, and the market analysts they bring in are usually knowledgeable about the issues at hand. Plus, it’s commercial free! Check your PBS station for local listings. Morningstar Morningstar has a plethora of information on the latest mutual funds, exchange traded funds, and other investment vehicles popular with investors. If you want to invest in commodities through a managed fund, make sure you consult the Morningstar website. Yahoo! Finance Yahoo! Finance includes many different sources of information all conveniently located in one site. You have market analysis updated on an hourly basis, regular news alerts, and one of the best chart services on the web. If you’re considering investing in companies that produce commodities, Yahoo! Finance is your one-stop-shop to get information on the stock’s technical performance as well as its fundamental outlook. Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is the federal regulatory body responsible for monitoring activities in the commodities markets. Before you do anything related to commodities, make sure you look at the website. Before you invest, you need to know your rights as an investor and the CFTC is the best source of that information. Also make sure to check out their very comprehensive glossary. The Energy Information Administration The Energy Information Administration (EIA) is part of the U.S. Department of Energy and is the official source of energy statistics for the U.S. government and your number one source for information on energy markets. They cover everything from crude oil production and consumption to gasoline inventories and natural gas transportation activity. If you want to invest in energy, make sure you check out their Country Analysis Briefs, which give an overview of the global energy supply chain country by country. Stocks and Commodities Magazine If your desire is to become a serious commodity futures trader, then Stocks and Commodities magazine is a must read. Its articles include market-tested trading strategies to help you place and execute trades. Oil & Gas Journal The Oil & Gas Journal is a subscription-based magazine that features in-depth articles about the energy industry. If you want to trade the energy markets, make sure to read O&G. National Futures Association The National Futures Association (NFA) is the industry’s self-regulatory organization. If you are interested in investing in the futures markets, check out the website before you start trading. Specifically, make sure to check out the database of registered investment advisors if you’re going to go through a manager. NFA has comprehensive information on all managers through its Background Affiliation Status Information Center (BASIC) service.