Investing - All Content

  1. Moral Hazards: A Bump In The Contract Road

    Learn how this phenomenon can cause a party in an agreement to behave differently than expected.
  2. What is a wild-card play?

    A wild-card play is a term related to futures contracts. A future is a financial contract obligating a buyer to purchase, or a seller to sell, a particular asset such as a physical commodity or a financial instrument at a predetermined future date and price.
  3. Financial Media 4-1-1 For Investors

    Cut through the information clutter and decipher the useful news from the useless.
  4. Limiting Losses

    It is impossible to avoid them completely, but there is a systematic method you can use to control them.
  5. How did currency trader John Rusnak hide $691 million in losses before being caught for bank fraud?

    In 1993, Allfirst Bank hired a currency trader to shift the bank's forex (FX) operations from a merely hedging endeavor to one that would yield profits and boost the bank's bottom line. To this end, Allfirst brought on John Rusnak, who had a decent track record in foreign currency trading at Fidelity and Chemical Bank.
  6. Your client has a net short-term gain of $3,000 and a net long-term loss of $8,000. Which of the following statements are true?

    I. The short-term gain is fully taxableII. $3,000 of capital loss is deductible against earned incomeIII. There is a long-term loss carried forward of $2,000IV. There is no loss carried forwardA. I & IIIB. I & IVC. II & IIID. I, II, & III Correct answer: CThe gain and the loss are netted and result in a $5,000 long-term loss.
  7. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually break it, but they forced the British government to pull it from the European Exchange Rate Mechanism (ERM). Joining the ERM was part of Britain's effort to help along the unification of the European economies.
  8. How does pyramiding work?

    Pyramiding is a method of increasing margin by using unrealized returns from successful trades. Pyramiding works by surrendering a minimal amount of previously-owned shares in order to pay a part of the exercise price. The surrendered funds are used to purchase a larger amount of option shares.
  9. Five Investing Pitfalls To Avoid, According to Investor's Business Daily

    Common sense or common folly? Discover some approaches to circumventing typical stumbling blocks on the road to profitable investing.
  10. Cut Your Tax Bill

    Paying your bills early or giving an extra donation now can help you come tax time.
  11. Warren Buffett: The Road To Riches

    Find out how he went from selling soft drinks to buying up companies and making billions of dollars.
  12. From Beads To Binary: The History Of Computing

    Investing today couldn't happen without the inventions of yesterday. Learn more here.
  13. Fight The Good Dollar-Cost Averaging Fight

    Stop sitting on the fence and learn both sides of this hot debate.
  14. For Companies, Green Is The New Black

    Sustainability and reducing environmental impact are hot corporate objectives. Find out why.
  15. The Basics Of Game Theory

    Break down and examine the potential consequences of economic/financial scenarios.
  16. Biggest Merger and Acquisition Disasters

    Find out which companies collapsed after merging.
  17. Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
  18. Multivariate Models: The Monte Carlo Analysis

    This decision-making tool integrates the idea that every decision has an impact on overall risk.
  19. What's the difference between a mutual fund and a hedge fund?

    These two types of investment products have their similarities and differences. First, the similarities: Both mutual funds and hedge funds are managed portfolios. This means that a manager (or a group of managers) picks securities that he or she feels will perform well and groups them into a single portfolio.
  20. What is a stripped bond?

    The quick answer to this question is that a stripped bond is a bond that has had its main components broken up into a zero-coupon bond and a series of coupons. To help explain one, let's first describe a bond. A bond is a debt instrument traditionally comprised of two parts, the face value (principal) and the coupons (interest rate).
  21. How does an investor make money on bonds?

    Bonds are part of the family of investments known as fixed-income securities. These securities are debt obligations, meaning one party is borrowing money from another party who expects to be paid back the principal (the initial amount borrowed) plus interest.
  22. How do you calculate the percentage gain or loss on an investment?

    Calculating the percentage change of your investment is quite easy. All it takes is a little bookkeeping and either a simple calculator or a pad of paper for doing the long division. Here is what you need to do:Take amount that you have gained on the investment and divide it by the amount invested.
  23. Can a stock lose all its value? How would this affect a long or short position?

    The answer to the first part of this question is pretty straightforward: yes, stocks are able to lose all their value in the market. Now, we don't want to scare you off investing in stocks, or investing in general. However, we would be lying if we told you that stocks carry no risk (although some carry more than others).To help you understand why a stock can lose all its value, we should review how stock price is determined.
  24. What is the difference between yield and return?

    Because investors are very concerned with how well their investments are performing or how they are expected to perform, knowing how to gauge such performance is essential. This makes understanding the difference between yield and return important. While both terms are often used to describe the performance of an investment, yield and return are not one and the same thing.
  25. Can a stop-loss order be used to protect a short sale transaction?

    The quick and simple answer to this question is yes. The major difference between the stop-loss order used by an investor who holds a short position and one used by an investor with a long position is the position in which it is placed. The individual with the long position wishes to see the price of the asset increase, whereas the individual with the short position wants the price of the asset to decrease and would be negatively affected by a sharp increase.
  26. If one of your stocks splits, doesn't that make it a better investment? If one of your stocks splits 2-1, wouldn't you then have twice as many shares? Wouldn't your share of the company's earnings then be twice as large?

    Unfortunately, no. To understand why this is the case, let's review the mechanics of a stock split.Basically, companies choose to split their shares so they can lower the trading price of their stock to a range deemed comfortable by most investors. Human psychology being what it is, most investors are more comfortable purchasing, say, 100 shares of $10 stock as opposed to 10 shares of $100 stock.
  27. Why do companies issue debt and bonds? Can't they just borrow from the bank?

    Companies issue bonds to finance operations. Most companies can borrow from banks, but view direct borrowing from a bank as more restrictive and expensive than selling debt on the open market through a bond issue. The costs involved in borrowing money directly from a bank are prohibitive to a number of companies.
  28. Why do commercial bills have higher yields than T-bills?

    The reason that commercial bills have higher yields than T-bills is due to the varying credit quality of each bill type. The credit rating of the entity issuing the bill gives investors an idea of the likelihood that they will be paid back in full. The federal government's debt (T-bills) is considered to have the highest credit rating in the market because of its size and ability to raise funds through taxes.
  29. What parties are involved in the creation of an American depositary receipt?

    An American depositary receipt (ADR) is a legal certificate issued by a recognized U.S. bank that represents a specific number of shares of a foreign corporation traded on a U.S. stock exchange. An ADR will be used by a foreign corporation that wishes to have a portion of its equity traded in the U.S.
  30. Why are options very active when they are at the money?

    Stock options, whether they are put or call options, can become very active when they are at the money. In the money options refer to when the strike price of a call option is below the market price of the underlying stock, and when the strike price of a put option is above the market price of the underlying stock.
  31. Are ETFs subject to the short sale uptick rule?

    Mutual fund use and development has increased rapidly ever since they were first introduced in the early 1920s. In the United States, mutual funds control over $9 trillion in assets. Under the category of mutual funds, exchange-traded funds (ETFs) have been around since the 1990s, and have become one of the most popular classes of mutual fund.ETFs differ from all other mutual fund classes in that they are traded just like stocks.
  32. Are eurodollars related to the currency called the euro?

    Eurodollars have little to do with the official currency of the European Union, the euro (EUR). In 1999, the euro was implemented as the official currency of the European Union as a means to further integrate the economies of that region. Most of the member states of the European Union have dropped their former domestic currencies completely, and all the major banking institutions in Europe now deal with euros in their transactions and operations.Eurodollars, though, are not found only in Europe.
  33. What happens when a circuit breaker is put into effect?

    A circuit breaker represents a situation where the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD) have announced a market-wide (includes NYSE, NASDAQ and OTC securities) trading halt in the event of a substantial one day decline in the value of the Dow Jones Industrial Average (DJIA).
  34. What is an Islamic investment policy?

    Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual and the secular.The establishment of an Islamic investment policy, be it for the institutional or individual investor, starts with the Sharia Board, a group of Islamic scholars (jurists) that vests investment products for compliance with Islamic Law and conducts ongoing due diligence of them.
  35. What is the difference between a collateralized mortgage obligation (CMO) and a collateralized bond obligation (CBO)?

    Both collateralized mortgage obligations (CMOs) and collateralized bond obligations (CBOs) are similar in that investors receive payments from a pool of underlying assets. The difference between these securities lies in the type of assets that provide cash flow to investors.
  36. The Short And Distort: Stock Manipulation In A Bear Market

    High-quality stock reports needn't be confused with stock manipulators' dramatic claims.
  37. Morningstar's Stewardship Grade Scores Big

    Morningstar's service gives investors an idea how well fund companies are safeguarding their interests.
  38. Alternative Investments In Your IRA

    If you stray off the beaten path when investing your IRA assets, you'll find new potential pitfalls and rewards.
  39. The Importance Of Segment Data

    Key financials often fail to provide insight into large cap companies.
  40. Monte Carlo Simulation With GBM

    Learn to predict future events through a series of random trials.
  41. The Power Of Program Trades

    Learn how programs make up a significant portion of the volume traded each day.
  42. From The Printing Press To The Internet

    Find out how this invention contributed to the development and evolution of the U.S. economy.
  43. Peer Comparison Uncovers Undervalued Stocks

    Learn how to put one of the top equity analysis tools to work for you.
  44. Offset Risk Without Investing Abroad

    With a little know-how, you can keep risk from topling your portfolio of domestic equities.
  45. The Darvas Box: A Timeless Classic

    This method helped its inventor turn $26,000 into $2 million. Many argue it still works.
  46. Fatal Seduction Of The Municipal Bond Insurers

    Learn how a foray into CDOs and other exotic products ruined an industry's image.
  47. Value Investing Using The Enterprise Multiple

    This simple measure can help investors determine whether a stock is a good deal.
  48. CDIC Protects Canadians From Bank Failure

    Bank failures can happen in Canada, but many deposits are insured. Find out what's covered.
  49. Timber Investments Cut Down Portfolio Risk

    Timber's low correlation to other asset classes can enhance your portfolio's growth.
  50. Mark-To-Market Mayhem

    Did this accounting convention contribute to the credit crisis of 2008? Find out here.
  51. Market Bottom: Are We There Yet?

    No one rings a bell when the bear market's over, but that doesn't mean there's no way to predict a bottom.
  52. What's the difference between a load and no-load mutual fund?

    A mutual fund is simply a large group of people who lump their money together for a management company to invest. And, like most things in life, there are fees and commissions involved. Mutual funds come in two main flavors, categorized by how the fees are charged.
  53. If I own a stock in a company, do I get a say in the company's operations?

    You don't get a direct say in a company's day-to-day operations, but, depending on whether you own voting or non-voting stock, you may have a hand in shaping its board of directors and deciding on special issues. Voting Stock – If the stock you own is a voting stock and you're a shareholder on record when a decision must be made through a vote, you have a right to vote on the issue.
  54. What does it mean when people say they "beat the market"? How do they know they have done so?

    "Beating the market" is a difficult phrase to analyze. It can be used to refer to two different situations:1. An investor, portfolio manager, fund or other investment specialist produces a better return than the market average. The market average can be calculated in many ways, but usually a benchmark - such as the S&P 500 or the Dow Jones Industrial Average index - is a good representation of the market average.
  55. Why do interest rates tend to have an inverse relationship with bond prices?

    At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer examination, it makes sense. An easy way to grasp why bond prices move opposite to interest rates is to consider zero-coupon bonds, which don't pay coupons but derive their value from the difference between the purchase price and the par value paid at maturity.
  56. How do stock splits affect short sellers?

    The simple answer to this question is that stock splits do not affect short sellers in a material way. There are some changes that occur as a result of a split that do affect the short position, but they don't affect the value of the short position. The biggest change that happens to the portfolio is the number of shares being shorted and the price per share.
  57. Why are some shares priced in the hundreds or thousands of dollars, while other just as successful companies have more normal share prices? For example, how can Berkshire Hathaway's be over $80,000/share, when the shares of even larger companies are only

    The answer can be found in stock splits - or rather, a lack thereof. The vast majority of public companies opt to use stock splits, increasing the number of shares outstanding by a certain factor (e.g. by a factor of two in a 2-1 split) and decreasing their share price by the same factor.By doing so, a company can keep the trading price of its shares in a reasonable price range.
  58. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates rise. By buying a bond, the bondholder has committed to receiving a fixed rate of return for a fixed period. Should the market interest rate rise from the date of the bond's purchase, the bond's price will fall accordingly.
  59. Is it true that you can sell your home and not pay capital gains tax?

    It is true in most cases. When you sell your home, the capital gains on the sale are exempt from capital gains tax. Based on the Taxpayer Relief Act of 1997, if you are single, you will pay no capital gains tax on the first $250,000 you make when you sell your home.
  60. What are the disadvantages of using net present value as an investment criterion?

    While net present value (NPV) calculations are useful when you are valuing investment opportunities, the process is by no means perfect.The biggest disadvantage to the calculation of NPV is its sensitivity to discount rates. After all, NPV computations are really just a summation of multiple discounted cash flows - both positive and negative - converted into present value terms for the same point in time (usually when the cash flows begin).
  61. How do I calculate the adjusted closing price for a stock?

    When trading is done for the day on a recognized exchange, all stocks are priced at close. The price that is quoted at the end of the trading day is the price of the last lot of stock that was traded for the day. This is called a stock's closing price.
  62. Do noise traders have any long-term effect on stock prices?

    There are two theories that are used to describe how securities are priced in the stock market: the efficient market hypothesis (EMH) and the inefficient market hypothesis. The EMH states that all stocks are accurately priced according to their underlying value and, therefore, there are no opportunities for investors to "beat the market" because all relevant information about a stock is already reflected in its price.
  63. What does CHIPS UID mean?

    CHIPS UID stands for Clearing House Interbank Payments System Universal Identifier. This is just a fancy name for an electronic clearinghouse database system, which facilitates the transfer of funds from both individual consumers and institutions. It is the back end of the automated clearing house (ACH) network, which is run by the National Automated Clearing House Association, and it provides the platform that allows exchanges to take place quickly and accurately.Developed in the 1970s, the key to the CHIPS UID system is that its database contains all the necessary information to identify specific participants, such as name, address, routing number, account number, etc.
  64. Who or what are the turtles?

    The "turtles" was a nickname given to a group of traders who were a part of an experiment run by two famous commodity traders. In 1983, Richard Dennis and Bill Eckhardt pondered the idea of whether being a great trader was a genetic predisposition or whether it could be taught.
  65. Is it possible to buy mutual funds using a margin account?

    Because of the pricing/trading mechanisms used with mutual funds, they cannot be bought and sold like stocks. When trading stocks, an investor can place limit orders, engage in short selling, buy on margin and make trades in the secondary market throughout the day.
  66. What are managed futures?

    Managed futures are futures positions entered into by professional money managers, known as commodity trading advisors, on behalf of investors. Managers invest in energy, agriculture and currency markets (among others) using futures contracts and determine their positions based on expected profit potential.A futures contract is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
  67. How can I buy oil as an investment?

    Investors have many options for getting involved with oil. These methods come with varying degrees of risk and range from direct investment in oil as a commodity, to indirect exposure in oil through the ownership of energy-related equities.One direct method of owning oil is through the purchase of oil futures or oil futures options.
  68. When Stock Prices Drop, Where's The Money?

    Market perception can create money - and make it disappear into thin air.
  69. The History Of Information Machines

    Discover how technology changed the way we exchange information when trading.
  70. Would You Profit As A Day Trader?

    Market timing is surrounded by controversy, but does it work?
  71. Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  72. Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  73. Why Warren Buffett Envies You

    The Oracle of Omaha can move over - there's a new investor in town.
  74. A Deeper Look At Alpha

    The Jensen index helps investors compare realized returns to what should've been achieved.
  75. Take Control With Investing Absolutes

    Uncover the three things most good stocks have in common: performance, profitability and value.
  76. Are long-term U.S. government bonds risk-free?

    For any debt obligation to be considered completely risk-free, investors must have full faith that the principal and interest will be paid in full and in a timely manner. The faith aspect of a debt obligation is measured by a country's credit rating. Much like an individual's credit rating is determined by his or her borrowing and repayment history, so too are governments' financial histories scrutinized.
  77. What are the advantages and disadvantages of buying stocks instead of bonds?

    This is a common question among investors. Stocks and bonds differ dramatically in their structures, payouts, returns and risks. In order to answer this question, we need to go through a brief description of both stocks and bonds. A bond is a form of debt with which you are the lender instead of the borrower.
  78. If the stock market is so volatile, why would I want to put my money into it?

    In this question, volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile the market is, and vice versa. Now, to answer this question, we must ask another one: is the stock market really volatile? The answer is, "Yes, it is … sometimes." The market is volatile, but the degree of its volatility adjusts over time.
  79. How does the government influence the securities market?

    Governments generally say they don't like to take an active role in the securities market (except for regulating it); however, there are methods and policies by which the government's actions may have an indirect influence on the market.Fiscal policies that affect the taxation of capital gains, dividends and interest gains may eventually have an effect on market activity.
  80. What is a mutual fund's NAV?

    Net asset value (NAV) represents a fund's per share market value. This is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding.
  81. What's the difference between absolute P/E ratio and relative P/E ratio?

    The simple answer to this question is that absolute P/E, which is the most quoted of the two ratios, is the price of a stock divided by the company's earnings per share (EPS). This measure indicates how much investors are willing to pay per dollar of earnings.
  82. How can you lose more money than you invest shorting a stock? If you have no money left in your account, how do you pay it back?

    The simple answer to this question is that there is no limit to the amount of money you can lose in a short sale. This means that you can lose more than the original amount you received at the beginning of the short sale. Therefore, it is crucial for any investor who is using short sales to monitor his/her positions and use tools such as stop-loss orders.
  83. I have only $500 to invest, am I limited to buying only penny stocks?

    No, you are not required to invest only in penny stocks - investors are generally not restricted to a certain kind of stock based on the amount of money they have. That is, a $500 investment is a $500 investment no matter how many shares you purchase or how high the share price.
  84. I live in the U.S. How can I trade stocks in China and India?

    Foreign markets have always been an object of envy to domestic investors because the indexes in some foreign countries have produced double- to triple-digit returns in the past. For example, the SETI 100 in Bangkok rose 117% in 2003, and Russia's RTS Index gained 72% in the first nine months of 2005.
  85. Is a Canadian resident allowed to participate in a direct stock purchase plan from a U.S. company such as Pfizer?

    There is no law that prevents Canadians from participating in direct stock purchase plans offered by U.S. companies. There are also no laws preventing Canadians from participating in dividend reinvestment plans (DRIPs) offered by U.S. companies. However, if these plans interest you, be advised that the U.S.
  86. How does a stop-loss order work, and what price is used to trigger the order?

    A stop-loss order, or stop order, is a type of advanced trade order that can be placed with most brokerage houses. The order specifies that an investor wants to execute a trade for a given stock, but only if a specified price level is reached during trading.
  87. Does a stock dividend dilute the price per share as would a forward stock split?

    Every corporation has the same goal in mind: to maximize shareholder wealth. This goal is fulfilled in two different ways, by re-investing cash into the business to stimulate its growth, or by paying dividends to shareholders. A dividend can take the form of either cash or stock.
  88. How do you calculate the cost basis for a mutual fund over an extended time period?

    Investors must pay taxes on any investment gains they realize. Subsequently, any capital gain realized by an investor over the course of a year must be identified when they file their income taxes. For this reason, being able to accurately calculate the cost basis of an investment, particularly one in a mutual fund, becomes extremely important.The cost basis represents the original value of an asset that has been adjusted for stock splits, dividends and capital distributions.
  89. Why would a multinational corporation conduct a vertical foreign direct investment?

    In many cases, multinational corporations conduct horizontal foreign direct investment (FDI) activities in order to expand their operations into another market. For example, an American retailer that builds a store in China is trying to earn more money by exploring the Chinese market.
  90. Why does a crisis in emerging markets cause U.S. Treasury yields to decrease?

    The reason that you will often see the yields on Treasuries fall when you see a financial crisis in an emerging or foreign market is due to what is known as a flight to quality. A flight to quality occurs when market participants move their money from higher risk, or lower quality, investments to lower risk, or higher quality, investments, which is usually triggered by an event in the higher-risk market.
  91. Why doesn't the price of a callable bond exceed its call price when interest rates are falling?

    A callable bond provides the issuer (borrowing entity) with an option to redeem the bond before its original maturity date. The ability to call a bond gives the issuer a way to respond to falling interest rates, a circumstance that allows the issuer to refinance this debt at a lower rate of interest.
  92. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security.A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages.
  93. Is there such a thing as a foolproof stock-picking strategy?

    Logically speaking, it is unlikely that anyone who has developed or stumbled upon a sure fire method to pick stocks will share their method, because the method will not work if too many people are aware of it and will be arbitrated away. However, it is also very unlikely that there exists a lucrative and sustainable guaranteed strategy.
  94. What is an echo bubble?

    To understand the term "echo bubble", you have to understand what a bubble is. A financial or economic bubble occurs when stocks trade at prices that exceed their intrinsic or true values. A stock trading beyond its true value eventually crashes, resulting in the decline of the stock price.
  95. Do Focused Funds Provide a Better Outlook?

    Should you diversify or focus? Read on to decide which will work best for you.
  96. Discover Master Limited Partnerships

    These unique investments provide significant tax advantages.
  97. Top 5 Reasons For A Stock Slide

    Prices seldom drop without cause. Find out what might make your stock hit the skids.
  98. The Pros And Cons Of Institutional Ownership

    These big players can both create and destroy value for shareholders.
  99. Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  100. Mechanical Investing Not A Golden Key

    Direct paths to wealth are getting narrower, fewer and may be locked up tight.
Frequently Asked Questions
  1. What is a BRIC nation?

    BRIC is an acronym for the combined economies of Brazil, Russia, India and China. The economies of these four nations are collectively called "the BRICs," "the BRIC countries," "the BRIC economies" or the "Big Four." The countries currently represent about 25% of the world's land mass and 40% of its population.
  2. What is the Dodd-Frank Act? How does it affect me?

    The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008. The act's numerous provisions, spelled out over thousands of pages, are scheduled to be implemented over a period of several years and are intended to decrease various risks in the U.S.
  3. I want to invest my emergency fund to earn interest. What is a relatively safe and liquid investment I can easily withdraw from if disaster struck?

    When considering where to put your emergency money, a key consideration is making sure you'll be able to access the money quickly, easily and without penalty, when you need it. Financial professionals don't recommend investing your emergency fund in the stock market because stocks are volatile.
  4. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a government authority or municipality in order to help it meet certain financial objectives or complete projects in the community.
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