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publicly-traded fundAfundwith afixednumberofshares outstanding, and one which does

notredeemshares the way atypicalmutual funddoes.Publicly-

tradedfundsbehave more likestockthanopen-end funds: closed-endfundsissuea fixed number of shares to thepublicin aninitial public offering,

after whichtime sharesin the fund areboughtand sold on astock exchange, and

they are not obligated to issue new shares or redeemoutstanding sharesas

open-end funds are. Thepriceof asharein a publicly-traded fund is determined

entirely bymarket demand, so shares can eithertradebelow theirnet asset

value("at a discount") or above it ("at a premium"). also calledclosed-end

investment companyorclosed-end fund

6 "Facts" About the Stock MarketbyRoger Wohlner

To help youdetermineareasonablerate of returntoexpecton

yourstockinvestments, it might be helpful toreviewsome "facts"

about the stockmarket:

- The stock market'shistoricalreturncanchangedramatically

depending on theperiodconsidered.

- The market tends torevert to a mean.

- History may not be a good predictor offuturereturns.

- Thepatternof actual returns affects yourinvestmentbalance.

- Historical returns do not include several items that investors

must dealwith.

- Investors have a difficult time earninghistorical returns.

These facts are only supplementary facts and have not yet taken

intoconsiderationtheriskyou are willing toincur. For that reason, it

will be up toyou as anindividual investortoconsiderhow much risk

you would be willing totakeon in your investments.

Source(s):

www.investorguide.com
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Investing is most intelligent when it is most businesslike.- Ben Graham

shares outstanding

Definition

The shares of a corporation's stock that have been issued and

are in the hands of the public.also called outstanding stock.Initial Public OfferingDefinitionIPO. The firstsaleofstockby acompanyto thepublic. The

mostcommonreason for a company to initiate an IPO is

inordertoraisemorecapital. One of the most difficultpartsof an IPO

is todeterminethe properpriceto initiallyofferthe new stock; too high

andinvestorswon't be interested, but too low and the company is

sacrificing theamountofmoneythat might have been made if they

priced it higher. There is generally asignificantamount ofriskin an

IPO, because the companygoing publicis frequently small or relativelyunknown, and hasn't had achanceto prove itself to the public; as

such, they also have thecapacityfor significantpayoffs.

regional exchangeAn SEC-registeredstock exchangewhich focuses

onlistingstocksofcorporationsin its geographic region.ThemajorU.S.regionalexchanges are the Boston, Chicago, Cincinnati, Pacific,

andPhiladelphia stock exchanges. Regional exchanges are usually significantly

smaller than exchanges that focus on listing stocks at the nationallevel. Many

stockslistedon regional exchanges are not listed on national exchanges.
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7/payoff.htmlhttp://www.investorwords.com/5872/capacity.htmlhttp://www.businessdictionary.com/definition/chance.htmlhttp://www.investorwords.com/2193/going_public.htmlhttp://www.investorwords.com/4292/risk.htmlhttp://www.businessdictionary.com/definition/significant.htmlhttp://www.investorwords.com/3100/money.htmlhttp://www.investorwords.com/205/amount.htmlhttp://www.investorwords.com/2630/investor.htmlhttp://www.investorwords.com/3389/offer.htmlhttp://www.investorwords.com/3807/price.htmlhttp://www.investorwords.com/9440/determine.htmlhttp://www.businessdictionary.com/definition/part.htmlhttp://www.investorwords.com/694/capital.htmlhttp://www.investorwords.com/4025/raise.htmlhttp://www.investorwords.com/3495/order.htmlhttp://www.businessdictionary.com/definition/common.htmlhttp://www.investorwords.com/3930/public.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.investorwords.com/4725/stock.htmlhttp://www.investorwords.com/4363/sale.htmlhttp://www.investorwords.com/2640/IPO.htmlhttp://www.investorwords.com/3536/outstanding_stock.htmlhttp://www.investorwords.com/3930/public.htmlhttp://www.investorwords.com/9897/hand.htmlhttp://www.investorwords.com/4725/stock.htmlhttp://www.investorwords.com/1140/corporation.htmlhttp://www.investorwords.com/4525/share.html


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However, regional exchanges alsofeaturestocks whichlistboth on the regional

and the nationalexchange.

Investors in the corporate bond market do not enjoy the same

access to information as a car buyer or, dare I say, a fruit buyer. -SEC Chairman Arthur Levitt

When You May Be Ready to InvestbyInvestorGuide Staff

If you've transitioned from adebtsituation to apaycheck-to-

paychecksituation to asavingsomemoneyeverymonthsituation,

you'rereadyto begininvestingwhat you save. You shouldstartby

amassing enough tocoverthree to six months of expenses,

andkeepthis money in a verysafeinvestmentlike a

moneymarketaccount, so you're prepared in theeventof

anemergency. Once you've saved up this emergency reserve, you

can progressto higherrisk(and higherreturn) investments: bonds for

money that youexpecttoneedin the nextfewyears, and stocks

orstockmutual funds for the rest. Usedollar cost averaging, by

investing about thesameamounteach month. This is always a good

idea, but even more so with the dramatic fluctuations in the market in

the past 10 years. Dollar cost averaging will make it easier to stomach

the inevitable dips.

Source

Common Stock Strategies - Part 1

InvestorGuide University>Subject: Investing>Topic: Investing Strategies> Common Stock

Strategies - Part 1

by InvestorGuide Staff (Write for us!)

Buy and Hold

The "buy and hold" approach to investing in stocks rests upon the assumption that in the long
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term (over the course of, say, 10 or more years) stock prices will go up, but the average investor

doesn't know what will happen tomorrow. Historical data from the past 50 years supports this

claim. The logic behind the idea is that in a capitalist society the economy will keep expanding,

so profits will keep growing and both stock prices and stock dividends will increase as a result.There may be short term fluctuations, due to business cycles or rising inflation, but in the long

term these will be smoothed out and the market as a whole will rise. Two additional benefits to

the buy and hold strategy are that trading commissions can be reduced and taxes can be

reduced or deferred by buying and selling less often and holding longer. Some proponents of

the buy and hold strategy of investing often believe in the Efficient Market Hypothesis or the

Random Walk Theory .

Market Timing

Market timing is essentially the opposite of buying and holding. Market timers believe that it is

possible to predict when the market, or certain stocks, will rise and fall. It therefore makes sense

to buy when the markets are low and to sell when they are high in order to maximize profits.

Market timers can use any number of different methods for timing the market - technical

analysis, fundamental analysis, or even intuition .

Most experts agree that market timing is incredibly difficult if not downright impossible. They

also warn against it because:

It's hard to say when the market or a particular stock is "high" or "low"; often a seemingly high

stock will go higher, and a seemingly low stock will go lower.

Commissions eat away at your profits when you trade frequently, especially on small

transactions.

The bid/ask spread also eats away at your profits, especially for thinly traded stocks.

In the long run, the market goes up. Unless you're a superb timer, you'll do better staying fully

invested at all times. For example, in the last 40 years, the market returned about 11.3%

annually. If you were fully invested the whole time, but got out completely for the 40 best

months, your annual return would've dropped to 2.7%. If you miss the big moves it hurts, and no

one really knows when they're coming.


5/28

Growth

Growth investors focus on one aspect of a company: its potential for earnings growth.

They believe that companies with high earnings growth will see their stock price

continue to increase, since investors will want to own profitable companies that can pay

large dividends in the future. The number that they pay the most attention to is earningsper share, especially how it changes from year to year, although they sometimes look at

revenue growth as well . Some investors also compare the price/earnings ratio with the

annual earnings growth, to get a feel for how much the market is willing to pay for a

given rate of earnings growth. Growth stocks tend to be from young companies, so they

are often riskier than the average security. They have the potential

fconstant dollar plan

Aninvestment strategydesigned toreducevolatilityin whichsecurities, typicallymutual funds,

are purchased infixeddollaramountsatregularintervals, regardless of

whatdirectionthemarketis moving. Thus, as prices of securitiesrise, fewerunitsarebought,and as pricesfall, more units are bought. also called constant dollar plan. also calleddollar

cost averaging.

or large gains, but they also have the potential for large

Be Cautious of GAAP-Based AccountingbyWarren Buffett

There are managers who actively useGAAPto deceive and defraud.

They know that many investors and creditorsacceptGAAP results as

gospel. So these charlatans interpret the rules "imaginatively"

andrecordbusiness transactions in ways that technicallycomplywith

GAAP but actually display aneconomic illusion to theworld. As long as

investors - including supposedly sophisticated institutions - place fancy

valuations on reported "earnings" that marchsteadilyupward, you can

be sure that some managers and promoters will exploit GAAP

toproducesuch numbers, no matter what the truth may be. Over the

years,Charlie Mungerand I have observed many accounting-based

frauds of staggering size. Few of the perpetrators have been punished;

many have not even been ensured. It has been far safer to steal large

sums with a pen than small sums with a gun.
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Stocks and Your Portfolio

InvestorGuide University>Subject: Stocks>Topic: Stock Basics> Stocks and Your Portfolio


The first thing you should know about stocks before adding them to your portfolio is that they

carry a certain amount of risk. This is because the returns on stock are not guaranteed; not by

the government, not by the company issuing the stock, and certainly not by your broker. That

means that there is a chance that your actual return will be different than what you had

expected. For instance, you might purchase stock under the expectation that its price will rise

steadily over time and that it will pay you annual dividends. However, if the company

experiences financial problems, you may not receive the price appreciation or the dividends that

you expected. In fact, the company could even go out of business, in which case you could lose

your entire investment. On the flip side, however, there is always the chance that the stock will

outperform your expectations. It could double in price and start paying out hefty dividends, in

which case you would enjoy a gain greater than what you had expected. Because there is

uncertainty regarding which of the various possible outcomes will occur, you bear a certain

amount of risk when purchasing the equity.

How do the risks associated with stocks affect your overall portfolio? That depends upon what

other investments are in your portfolio. In general, the risks associated with investing in stocks

are greater than the risks associated with investing in bonds or money markets . At the same

time, however, the risks associated with investing in stocks are less than the risks associated

with investing in options or futures . Of course, not all stocks pose the same level of risk: some

(such as internet stocks) are much higher risk than others (such as utilities), so it's important to

understand the amount of risk you would be taking on with any given investment.

In order to manage the risks associated with investing in stocks,most investors turn to a practice

called diversification when building their stock portfolios. Diversification is a method of risk

reduction in which investors buy multiple securities instead of just one. As a shareholder in

several companies, the diversified investor knows that if one of his or her stocks happens to fail

then there is always the chance that another one could gain enough to offset the loss. It's

basically just a way for you to not put all your eggs in one basket, which is also the concept
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underlying mutual funds . There are two ways to increase your diversification (and reduce your

risk): increase the number of stocks you own or own stocks that are fundamentally different from

one another. Of course, you can't totally eliminate all the risks involved in stock investing

because there is still market risk, the risk that the entire market will fall. In that case, no matterhow well diversified you are, your portfolio will suffer.

The other variable that will influence the amount of risk in your stock portfolio is your time

horizon. Over the long, long term (several decades), history has shown time and again that

stock prices outperform almost all other investments. However, in the short run stock prices

often go down (about half the time, if the time period is sufficiently short). That means that if you

are at a point in your life when you may need to sell your stocks in the short run (such as if

you're close to retirement), then you may want to think twice about investing in stocks. There

www.SunnyProfits.com

is a definite possibility that the stocks that you buy now may be worth significantly less one or

two years in the future. Most likely, however, they will be worth significantly more ten or twenty

years in the future. So before you invest in stocks, you should sit down and examine both your

own time horizons and those of the market in order to see whether or not you can bear the risks

associated with short term stock investing.

Once you've thought about the risks associated with stock investing and figured out your plans

for diversification, the next issue to consider when adding stocks to your portfolio is which

stocks to add. You'll first want to take a look at your particular investing objectives. If you're

looking for steady income with low risk, you may want to consider investing in income stocks .

On the other hand, if you're looking for opportunities that may result in a big payoff and you're

not too concerned about the risks involved, you might want to try investing in growth stocks .

There are a number of different stock strategies that you can use to try to meet your goals .

Once you've decided on a strategy, the last step is to determine whether or not you should buy

the stocks you want given the prices at which they are selling. In order to do this, you value the

stocks you are interested in according to what you believe they are worth and then compare

them to their market prices. If you think your stocks are worth more than what they are selling
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8/28

for, then they are good candidates for purchase. If you think they are worth less than their price,

then you might want to wait before purchasing them. The method of determining a stock's worth

is called valuation, and there are many different approaches to it. Some investors look at a

company's fundamentals while others look at quantitative data regarding the stock's price xitstrading patterns . You'll probably want to look at both of these techniques in detail before settling

upon which one you think is the best method for you to value stocks for your portfolio. You

should also check out our "Choosing a Stock" section for more advice on how to select

individual stocks to invest in .

It is a socialist idea that making profits is a vice; I consider thereal vice is making losses. - Winston Churchill

OCCOptions Clearing Corporation. Theorganizationthathandlesclearingof the

options trades for the various optionsexchangesandregulatesthelistingof new

options. It is regulated by theSecurities and Exchange Commission, and is

ownedjointlyby the U.S.stock exchangesthattradeoptions (American Stock

Exchange,Chicago Board Options Exchange,Pacific Exchange,

andPhiladelphia Stock Exchange). Thefactthat alllisted optionsare cleared

through OCCmeansthat all options arefreeofdefault risk, since the

OCCguaranteesalloption contracts. Therefore, thebuyeror asellerofanoptiononlyfacesthecredit riskof the OCC (which is minimal), not

thecreditriskof thecounterparty. Inordertomanagerisk, the

OCCimposesmargin requirementson all optionsbrokers. Themargin

requirementdepends on the particulars of each specificcontract.\

Pros and Cons of Online InvestingbyMontana Securities Department

Consider thesourceof anyinformationyouobtainonline. Some

investors use the Internet toconductrelatively simple transactions

such as buying andsellingstocks, bonds and mutual funds. Others use

the Internet tomonitorthe market, research

companies,tradeinformation with other investors and actively trade

their portfolios. It canoffersimple accessto awealthof reliable
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information includingbusinessandfinancialpublications, annual

reports, SEC filings andsecuritiesregulators.

However, not all online information is reliable. Online con artists make

claims about visiting companies, inspecting mining operations andhaving personal

conversations withcompanyofficials. Keep in mind that you may not

be able to verify who is making these claims, much less whether the

information is true. Also, it is extremely unlikely that genuine

What are Stock Option Plans?

InvestorGuide University>Subject: Options>Topic: Employee Stock Options> What are

Stock Option Plans?


Employee ownership has grown greatly in popularity over the last decade, and the growth is

expected to continue. There are two types of arrangements through which employees can gain

partial ownership of their employer's company and share in its growth: stock ownership plans

and stock option plans. The two are similar but not identical, so it's worthwhile to look at each in

turn.

An employee stock ownership plan (ESOP) is a tax-qualified, defined-contribution retirement

plan which makes a company's employees partial owners. Contributions are made by the

sponsoring employer, and can grow tax-deferred, just as with an IRA or 401(k). But unlike other

retirement plans, the contributions must be invested in the company's stock. The benefits for the

company include increased cash flow, tax savings, and increased productivity from highly

motivated workers. The main benefit for the employees is the ability to share in the company's

success. Due to the tax benefits, the administration of ESOPs is regulated, and numerous

restrictions apply.

An employee stock option plan gives you the right to buy a certain number of shares of your

employer's stock at a stated price (called the grant price, strike price, or exercise price) over a

certain period of time (for example, ten years). Nearly all stock option plans are offered by

companies which are publicly traded or which will soon go public. In many cases, the shares
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"vest" over a period of several years, meaning that some fraction of the shares can be exercised

in the first year, another fraction in the second year, and so on. Whenever the option's exercise

price is above what the stock currently trades for, the option is "in the money". Otherwise, it is

"underwater".

There are two basic types of stock options: non-qualified stock options and incentive stock

options. Here are the major differences between the two.

For nonqualified stock options, you usually don't owe any taxes when the options are granted,

but pay ordinary income tax on the difference between the exercise price and the current stock

price value when you exercise the options. Companies can deduct this amount as a

compensation expense. Any subsequent appreciation in the stock is taxed at capital gains rates

when you sell the shares (which is more favorable if you hold for at least one year). They can be

granted at a discount to the current stock price, and they are transferable to children and charity

(provided your employer allows it).

For incentive (or "qualified") stock options (ISO's), no income tax is due when the options are

granted or when they're exercised. Instead, the tax is deferred until you sell the stock, at which

time you are taxed for your entire gain. Aslong as you sell at least two years after the optionswere granted and at least one year after you exercised them, you'll be taxed at the lower, long-

term capital gains rate; otherwise, the sale is considered a "disqualifying disposition", and you'll

be taxed as if you had held nonqualified options (the gain at exercise is taxed as ordinary

income, and any subsequent appreciation is taxed as capital gains). ISO's may not be granted

at a discount to the current stock price, and they are not transferable, except through a will.

There are three basic ways to exercise your options:

Pay cash: This is the simplest technique.

Stock swap: Some employers let you trade company stock that you already own to acquire

option stock. Since the exercise price is below the stock price, you will get more shares than

you give up.


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Cashless exercise: In this technique, you borrow from a broker the amount you need to exercise

your options and sell just enough of these shares to cover the costs. You receive the difference

in stock or cash.

Please note that this section is intended as only a very basic introduction to employee stock andoption plans. The topic is complex and there are a large number of rules that must be followedin order to avoid penalties and maximize the benefit to you. If you are participating in a stockownership plan or stock option program, or if you have shares or options from a formeremployer, we strongly encourage you to learn more and consider talking to a financial or taxprofessional before making any major decisionsTerm of the Day

Rule 12b-1 feeAn extrafeechargedby somemutualfundstocoverpromotion,distributions,marketingexpenses, andsometimescommissionstobrokers. A genuineno-load funddoes not haveRule12b-1 fees, although somefundscalling themselves "no-load" do have Rule12b-1 fees (as do someload funds). Rule12b-1 feeinformationis disclosed inafund'sprospectus, is included in tTerm of the Day

coattail investing

Atrading strategyin which aninvestortries toduplicatetheperformanceof a

successful (and usually well-known) investor bycopyingtheirtradesas soon as

they are madepublic. This is ariskystrategy, since there is a timedelaybetween

when the successful investor's trades occur and when they are made public, andbecause the strategy disregardsoverallportfolioconsiderations,risk tolerance,

and other unique circumstances

he statedexpense ratio, andWhen to Start ReceivingSocial Security BenefitsbyRich White

When tostartSocial Securityis acomplexdecisionthat should be

personalized for eachindividual, and it can involve many factors,

ranging from thepotentialto continueworking, to attitudes about

longevity andinflation. Permanent reductions for starting benefits

before fullretirementage are assessed on a monthlybasis, so there is

no hurry to make the start-date decision. By waiting to start until
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ment.htmlhttp://www.investorwords.com/4240/retirement.htmlhttp://www.investorwords.com/4240/retirement.htmlhttp://www.investorwords.com/10350/monthly.htmlhttp://www.investorwords.com/10350/monthly.htmlhttp://www.investorwords.com/10350/monthly.htmlhttp://www.investorwords.com/4240/retirement.htmlhttp://www.investorwords.com/2452/inflation.htmlhttp://www.businessdictionary.com/definition/working.htmlhttp://www.investorwords.com/10666/potential.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.businessdictionary.com/definition/decision.htmlhttp://www.businessdictionary.com/definition/complex.htmlhttp://www.investorwords.com/4617/Social_Security.htmlhttp://www.investorwords.com/11175/start.htmlhttp://www.investorwords.com/tips/authors/1/rich-white.htmlhttp://t.pm0.net/s/c?u.kh15.28.m46p.2fl8thttp://t.pm0.net/s/c?u.kh10.23.m46i.2fl8thttp://t.pm0.net/s/c?u.kh10.22.gcaz.2fl8thttp://t.pm0.net/s/c?u.kh10.21.7afm.2fl8thttp://t.pm0.net/s/c?u.kh10.20.l687.2fl8thttp://t.pm0.net/s/c?u.kh10.19.hc7f.2fl8thttp://t.pm0.net/s/c?u.kh10.18.7wb9.2fl8thttp://t.pm0.net/s/c?u.kh10.17.m46h.2fl8thttp://t.pm0.net/s/c?u.kh10.16.7524.2fl8thttp://t.pm0.net/s/c?u.kh10.15.7h4n.2fl8thttp://t.pm0.net/s/c?u.kh10.14.m46g.2fl8thttp://t.pm0.net/s/c?u.kh10.13.8hdm.2fl8thttp://t.pm0.net/s/c?u.kh10.12.m46f.2fl8thttp://t.pm0.net/s/c?u.kh10.11.66tq.2fl8thttp://t.pm0.net/s/c?u.kh10.10.7wbc.2fl8thttp://t.pm0.net/s/c?u.kh15.27.cwsd.2fl8thttp://t.pm0.net/s/c?u.kh15.26.m46o.2fl8thttp://t.pm0.net/s/c?u.kh15.25.2puw.2fl8thttp://t.pm0.net/s/c?u.kh15.24.m46n.2fl8thttp://t.pm0.net/s/c?u.kh15.23.m46m.2fl8thttp://t.pm0.net/s/c?u.kh15.22.751u.2fl8thttp://t.pm0.net/s/c?u.kh15.21.m46l.2fl8thttp://t.pm0.net/s/c?u.kh15.20.m46k.2fl8thttp://t.pm0.net/s/c?u.kh15.19.7afp.2fl8thttp://t.pm0.net/s/c?u.kh15.18.7afq.2fl8thttp://t.pm0.net/s/c?u.kh15.16.gc9r.2fl8thttp://t.pm0.net/s/c?u.kh15.16.gc9r.2fl8thttp://t.pm0.net/s/c?u.kh15.15.751t.2fl8thttp://t.pm0.net/s/c?u.kh15.14.m46j.2fl8thttp://t.pm0.net/s/c?u.kh15.13.7n3l.2fl8thttp://t.pm0.net/s/c?u.kh15.12.7521.2fl8thttp://t.pm0.net/s/c?u.kh15.12.7521.2fl8thttp://t.pm0.net/s/c?u.kh15.11.8yeb.2fl8thttp://t.pm0.net/s/c?u.kh15.10.7dc7.2fl8t


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three months after age 62, for example, you canavoidthree

months'worthofpermanentbenefitreductions. Clearly, individuals

have different levels ofconfidencein theirabilityto "invest the

difference" successfully. Some people don'twantthe extrapressureofhaving toinvestcritical retirement assets in uncertain markets. As for

the fear-based argument, Social Security benefits are not guaranteed,

and Congress can make anyfuturechanges it wishes.

Source(s):

Social Security and the Benefits Provided by It

InvestorGuide University>Subject: Retirement>Topic: Social Security> Social Security and

the Benefits Provided by It


The Social Security program is a Government-operated retirement plan that provides monthly

income to retirees. It was designed to meet the basic needs of retirees, but if you're not yet

close to retirement, we recommend that you don't rely too heavily on Social Security in your

financial planning. Most people need 70-80% of their pre-retirement income to maintain the

same standard of living, and the Social Security income is a lot lower than that.

If you work for an employer, Social Security taxes are withheld from each paycheck and sent

together with the employer's matching contribution to the IRS; the company also reports your

earnings to Social Security. If you are self-employed, you pay the Social Security taxes and the

IRS reports your earnings to Social Security. "Credits" are earned through work and taxes;

these credits go toward the Social Security benefits. In order to be eligible to receive the

benefits, you are required to have at least 40 credits or 10 years of work.

The types of benefits provided by Social Security are:

Retirement

The income received as retirement is based on the participant's average earnings during his or

her life. There is a limit to the contributions made each year, but in general, the more a

participant earns, the more money he or she will receive.
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13/28

A participant is eligible to collect this income if "fully Insured", meaning that a person has to

have worked for at least 10 years or 40 calendar quarters. The Social Security Administration

will provide an estimate of the monthly income to those close to retirement.

In order to collect the benefit, the participant must be fully insured, be 62 years old, and must

apply two or three months prior to the date of retirement. If you decide to wait until age 65, the

benefits increase by about 7% for every year of delay.

Benefits can be lost after starting the collection of the income if the amount of the adjusted

gross income is above a certain amount, which changes periodically. Also, part of the income

can also be taxed if the retiree's AGI is above a certain amount.

Considering the amounts that you will receive at retirement it is important to look at all your

other options. Make maximum contributions to tax-deferred accounts and diversify your

portfolio.

Disability

Benefits are payable if a participant has suffered sever physical or mental disabilities preventing

them from working regularly for a year or more or in cases when the condition might lead to

death.

Family Benefits

A participant's spouse who is at least 62 years of age, or younger but caring for a child under 16

is eligible to receive retirement or disability benefits.

Survivors

At death, some members of the participant's family can be eligible for benefits. The participant's

widow(er) age 60 or older, or age 50 or older and disabled, or any age caring for a child under

16; and/or


14/28

balloon maturityArepayment schedulefor anissueofbondsin which a largenumberof the

bonds comedueat thesametime, typically thefinal maturity date. This

termappliesonly to bonds which do not have asinking fund provision. Aballoonmaturitycan putcompanycash

flowunderstressifadequatepreparationsare not made.

Short Selling

InvestorGuide University>Subject: Stocks>Topic: Stock Strategies> Short Sellingby InvestorGuide Staff (Write for us!)

Short selling (or "selling short") is a technique used by people who try to profit from the falling

price of a stock. Short selling is a very risky technique as it involves precise timing and goes

contrary to the overall direction of the market. Since the stock market has historically tended to

rise in value over time, short selling requires precise market timing, which is a very difficult feat.

Here's how short selling works. Assume you want to sell short 100 shares of a company

because you believe sales are slowing and its earnings will drop. Your broker will borrow the

shares from someone who owns them with the promise that you will return them later. You

immediately sell the borrowed shares at the current market price. When the price of the shares

drops (you hope), you "cover your short position" by buying back the shares, and your broker

returns them to the lender. Your profit is the difference between the price at which you sold the

stock and your cost to buy it back, minus commissions and expenses for borrowing the stock.

But if you're wrong, and the price of the shares increase, your potential losses are unlimited.

The company's shares may go up and up, but at some point you have to replace the 100 shares

you sold. In that case, your losses can mount without limit until you cover your short position.

Here are a few reasons why short selling might make sense:
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Some investors are better at identifying overpriced, bad companies than underpriced, good

companies.

Brokers and analysts focus on what to buy, not what to sell, so the good news is more widely

known than the bad news. When an analyst issues a sell recommendation on a stock, they findit much harder to get information from the company's investor relations department, and the

analyst's firm would never get an opportunity to raise capital or float a bond for the company, so

they focus more on good news than bad. If you discover bad news, it might not yet be totally

factored in to the current price of the stock.

Many institutions just won't do short selling, leaving unexploited short selling opportunities from

which you can benefit.

A portfolio which includes both long and short positions in stocks which tend to move together

will generally have lower volatility than one which has only long positions.

But short selling is not as easy and profitable as it may sound; there are a lot of caveats:

As we mentioned, there's unlimited downside potential (i.e. if the stock price keeps rising, you

keep losing). Most short sellers set a limit to how much they're willing to lose, but then they

become vulnerable to a short 'squeeze', in which long investors buy shares as the stock rises

and demand delivery. As short sellers buy to cover their losses, the price continues to rise,

triggering more short sellers to cover their losses, etc. This is a risk especially for small, illiquid

companies. The danger is that even if the stock is overpriced, it may become even more

overpriced, and you will have to buy it at some point to cover your position. When you sell short,

you're not just betting on what the stock is worth, you're betting on what the market will be

willing to pay for the stock in the future.

You're fighting the trend of the market, which is, in the long run, up. When you buy a stock that

you're confident is greatly undervalued, you should feel content to wait as long as it takes for the

dividends to start rolling in (provided youhave a sufficiently long investment horizon). When

you're on the short side, however, you will eventually need to buy the shares back, at whatever

the market price happens to be; and while you wait and wait for the speculative bubble to burst,

the rest of the market will probably continue on its upward trajectory.

SEC rules allow investors to sell short only on an uptick or a zero-plus tick. In other words, you

cannot sell a stock short if it is already going down. This rule is in effect to prevent traders


16/28

known as "pool operators" from driving down a stock price through heavy short selling, then

buying the shares for a large profit.

Money from a short sale isn't available to the seller, but is escrowed as collateral for the owner

of the borrowed shares. You aren't earning interest on the money (although big institutionssometimes do, in the form of rebates).

You have to pay any dividends that are earned (since in effect you have a negative number of

shares).

You pay the (usually higher) short term capital gains tax on your profits, regardless of how long

you held the short position.

Another company could acquire the company you're shorting, possibly at a significant premium,

which would drive up the share price.

Sometimes shares aren't available to short.

While we don't recommend short selling for the above reasons, you may decide to include it in

your overall strategy. If you do, consider mitigating the risk by setting strict quitting prices (say a

20% loss per investment). If it reaches that limit, resist the temptation to hang on, thinking it's

even more overpriced now. Successful short selling is all about timing, which makes it more like

technical analysis than fundamental analysis.

Some short-sellers target the following types of companies:

Small cap companies that have been driven up by momentum investors, especially companies

that are difficult to value.

Companies whose P/E ratios are much higher than can be justified by their growth rates.

Companies with bad or useless products and services.

Companies riding the latest fad.

Companies that have new competition coming.

Companies with weak financials (bad balance sheet, negative cash flows, etc.).

Companies that depend too heavily on one product.


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equityOwnershipinterestin acorporationin the form ofcommon stockorpreferred

stock. It also refers tototal assetsminus totalliabilities, in which case it is also

referred to asshareholder'sequityornet worthorbook value. Inreal estate, it is

the difference between what apropertyisworthand what the

ownerowesagainst that property (i.e. the difference between

thehousevalueand the remainingmortgageorloanpaymentson a house). In

the context of afuturestradingaccount, it is the value of thesecuritiesin the

account, assuming that the account is liquidated at the goingprice. In the context

of abrokerage account, it is thenetvalue of the account, i.e. the value

ofsecuritiesin the account less anymargin requirements.

"Since the Industrial Revolution began, going downstream -investing in businesses that will benefit from new technologyrather than investing in the technology companies themselves -has often been the smarter strategy." - Ralph Wanger

Two Laws on Bullish and Bearish EconomistsbyWilliam Sherden

Remember the First Law of Economics: For everyeconomist, there is

an equal and opposite economist--so for every bullisheconomist, there

is a bearishone. The Second Law of Economics: They are both likely to

be wrong.
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