What are the basics of options?
Options are contracts used by investors to take a speculative position – or a hedge – based on expected future price movements of the underlying securities. Many investors are scared when they heard the word "option" and perceive it as a risky, speculative investment. Options certainly can be risky, but they don’t have to be. In fact, certain options strategies are far more conservative than many available investments in the marketplace. Continue reading...
Which is Better for Me: a Roth or Traditional IRA?
The choice between a Roth IRA and a Traditional IRA depends on available discretionary income and financial situation. Both IRAs have the same contribution limits. The Traditional IRA goes in pre-tax (generally), grows tax-deferred, and is taxable as income on withdrawal. The Roth goes in after-tax, grows tax-deferred, and is not taxable upon withdrawal. That’s the primary difference. This will allow you to lower your current taxable income by making Traditional IRA contributions, which may seem more appealing in a number of ways. There’s the effect of immediate gratification that leads investors to favor this way, and the fact that you’re technically paying more (by the amount of taxes you paid on the after-tax Roth) to make the same current contribution to a Roth. Continue reading...
How Much Does (and Will) Social Security Pay?
Social Security uses a formula that applies a factor to your average monthly income from the 35 years in which you earned the most. The benefit will be calculated for your Normal Retirement Age (67 for most people today), and you should receive statements in the mail keeping you updated on your projected or actual Social Security Retirement Benefits. Every year, you should get a statement from the Social Security Administration that provides you with exact numbers. The amount depends on the age at which you retire, and the contributions you made to Social Security over the years. The formula uses the 35 years in which you earned the most, and divides it by the total number of months in 35 years, which is 420, which leads to your Average Indexed Monthly Earnings (AIME). Continue reading...
Where do I Find a Good Attorney for my Estate Needs?
There are thousands of attorneys that specialize in estate planning, so choosing the right one for you can be a challenge. If possible, referrals are the best approach. Your Financial Advisor should definitely have resources and a network available to recommend a reliable estate and/or tax attorney for you — someone he or she has been working with for a number of years at least. Ultimately, the best source is a referral from a friend or someone else you trust. Continue reading...
What is Life Insurance?
Life insurance is one of the oldest financial products in existence, with roots going back beyond the ancient Roman Empire. Today, there are many different kinds of life insurance available, most representing variations on the main categories of term life, whole life, and universal life. It can be written in a private contract, but most often it is offered as packaged products to the public. Life Insurance’s main purpose is to ensure that dependents of a deceased provider or caretaker will have some financial resources to fall back on, but it can also be used as a means to create a guaranteed legacy or a tax-advantaged pool of money. Continue reading...
What is Par Value?
Par value is the nominal value of a security (such as a stock or a bond) that is typically indicated on the certificate of ownership. Par value is most often associated with bonds, and refers to the amount that will be returned to the investor at the bond’s maturity. Par value of bonds is generally $100 or $1,000. Bonds traded on the open market are not generally bought and sold at par value, as they typically trade at a premium or a discount to par. Bond prices are influenced by interest rates, and have an inverse relationship with them. Continue reading...
What is Effective Annual Interest Rate?
Also known as the annual equivalent rate (AER), the effective annual interest rate is the actual annual interest rate on a bond or loan when it compounds more than once a year. The effects of compounding will make the AER higher than the annual interest rate if the security compounds greater than annually. Continue reading...
What is Counter-Party Risk?
Counter-party risk is the risk that the person on the other side of the trade will not meet his or her contractual obligations. In other words, it’s essentially the risk of doing business with someone. In financial contracts, counter-party risk is also known as “default risk.” Continue reading...
What are Accounting Records?
Accounting records are the supporting documents that verify the history of transactions, audits, and reports. Accounting documents are sometimes required to be kept on file for a certain number of years. They may be paper or electronic records. Records may include point-of-sale documents such as receipts and invoices, as well as inventory delivery and audit records, and the results of internal and third-party audits from various periods. Continue reading...
What is a Bond?
A bond is a contract which “binds” the lender to the debtor, where an individual investor is generally the lender and the debtor is the company or government which has borrowed funds. When a company or government entity needs more capital, whether to fund operations or a specific project, it can borrow money from investors instead of from a banking institution. Where there is a risk of the investor not being repaid, the interest rate will be proportionally higher. The simplest way a bond works is with set payments at set intervals that gradually repay the debt and interest owed to the investor over a set amount of time. Continue reading...