smartwomansecurities October 17 2007 Investing Now LECTURER NAME

What happened in the market this week • What happened in the market during the past week

investment accounts

Investment accounts • Taxable – With a taxable account, you pay no income tax on increases in an investment’s value while you own it until you sell it and realize the profit. – Being “tax-efficient” (ie. Mutual funds, index funds) • Tax-deferred – A tax-deferred account allows you to postpone income tax that would otherwise be due on employment or investment earnings you hold in the account until some point the future, often when you retire. – In return for postpoing taxes, however, you agree to limited access to your money before you reach age 60. – IRA – 401 k • Tax-exempt – Some investments are tax exempt, which means you don’t have to pay income tax on the earnings they produce. – Roth IRA Source: www. pathtoinvesting. com

Investing and taxes • Income Tax Rate 35. 0% • Short-Term Capital Gain Rate 35. 0% - Less than one year • Long-Term Capital Gain Rate 15. 0% - Greater than one year • Unrealized Capital Gain Rate 0. 0%

Investment return • Investment Return = + Value of stock at purchase + Capital gains + Dividends - Taxes - Inflation

brokers

Mutual fund companies? • A Mutual Fund Company is a company that pools money from shareholders and invests in a variety of securities such as stocks, bonds, and money market instruments. – ie. Vanguard • However, you don’t have to open up an investment account at a mutual fund company is you want to invest in a mutual fund. – Most mutual fund companies offer brokerage services, and their commissions are usually significantly higher than online discount brokerages. • A mutual fund company is a good choice if your plan is to invest only in index funds, especially if you are inclined to add small amounts to your account on a regular basis • However, most discount brokerages will let you invest in mutual funds for free, so you don’t need to go through a mutual fund company. Source: Motley Fool’s “How to Start Investing” Guide

Opening an account • Brokerage firms – Choosing a broker – Types of account – Managing your account • Mutual fund company

What are brokers? • Brokers are middlemen that mainly exist to execute your trades. • There are full-service and discount brokerages. – ie. Merrill Lynch is a full-service brokerage; Ameritrade is a discount brokerage. • Full-service brokerages offer recommendations and handholding, and for that they may typically charge you up to $100 or even several hundred dollars per trade. – (This is why stockbrokers make so much money) • However, if you want to conduct your own research, you can open your account with a discount broker. They typically charge $10 or $15 or less per trade and offer an ever-increasing array of services—including published research reports featuring recommendations. Source: Motley Fool’s “How to Start Investing” Guide

Comparing brokerages • Fees – Commissions per trade – Account maintenance fees • Account minimums • Services – How you can trade – Customer service – Account statements

Commissions and minimums • Commissions – How much do they charge per trade for a market order? – The answer might range from $7 or less up to $30 or more per trade. o If you only plan to trade once or twice a year, the difference shouldn't matter too much. But if you trade twice a month, the difference between $10 and $25 trades amounts to $360 per year. • Account minimums – Check for different types of accounts. – Is it lower for IRAs? Is it lower if you agree to an automatic deposit plan? o If you're investing a lot, this factor might not be a deal-breaker for you. But if you've got just $1, 000 to invest, you can cross off any brokerages with minimums higher than that. • Account maintenance fees: – Check for account maintenance fees: some brokers may have account closing or transfer fees. Compare the fees that you’re likely to be changed at any brokerages you’re considering. Source: Motley Fool’s “How to Start Investing” Guide

Brokerage services • How you can trade: – All online brokers offer Web-based trading, but do they also allow you to make trades over the phone? And how much more do they charge for these services? Do they have local offices/branches? • Research: – Do they have research readily available for you to access? This is especially important to understand your investments. • Customer service: – Do they have a reasonably good reputation for customer service? You can assess this for yourself just by calling or emailing each contender and asking any questions you have. • Account statements: – Are their account statements easy to read? You may be able to view sample statements on their website. If not, perhaps some contenders will fax or mail you sample • Note: many of these brokerage firms also offer banking solutions now as well, where you can open a savings and checking account along with your brokerage account, and vice versa (for example, Bank of America, a traditional commercial bank, has been trying to grow its brokerage business and now offers $0 equity trades if you have over $25, 000 in assets held in Bof. A accounts).

Discount brokerages • Research a bunch of brokerages and make sure you understand the fee structures, the services, and other features that are important to you. If you’re still not sure about which broker to choose, pick one with no transfer or account-closing fees, and you can always switch at a later point. more established low fees Fidelity Scottrade www. fidelity. com www. scottrade. com E*Trade Sharebuilder www. etrade. com www. sharebuilder. com TD Ameritrade Zecco www. ameritrade. com www. sharebuilder. com Charles Schwab Trade King www. schwab. com www. tradeking. com

types of accounts

Types of accounts • Cash account • Margin account • Options account • IRA account – Traditional – Roth

Cash account • A cash account is the simplest type of brokerage account and what you will most likely open. • Most online and discount brokers will require you to make a deposit with enough money to cover your trade before they will open your account. – Many brokers will place this money in an interest-bearing account until you are ready to trade. • When you place a buy order, the broker transfers the money to the brokerage account to cover the trade. • When you sell a stock, the broker will deposit the proceeds in the account (unless you instruct them otherwise), so cash is available for the next purchase. Source: About. com

Other accounts • margin account: – With a margin account, you can borrow from your broker in order to invest in additional stock (or even just for your personal use). The interest rates that brokers charge, while below typical credit card rates, make the return that you need to earn on your investments much higher than if you're investing with your own cash. o For example, if you're being charged 9% margin interest, then you'd better earn a good bit more than 9% on your investments in order to make the borrowing worthwhile. If your holdings head south for a while, you may find yourself making hefty interest payments while waiting for your investments to recover. • option account: – This type of account allows you to trade options, which is a much riskier business than trading stocks. In general, options are also for advanced investors. They have relatively high fees associated with them, a short timeline, and can result in you losing all the money you put into them. (Very few stocks ever get to zero value like options can -- and often do. ) Source: Motley Fool’s “How to Start Investing” Guide

Individual Retirement Account (IRA) • An Individual Retirement Account (IRA) is a brokerage account that allows earnings to compound over time on either a federally tax-free or tax-deferred basis. – Investments in tax-advantaged accounts can compound more quickly than those in taxable accounts. • A Roth or Traditional IRA is widely considered the most advantageous retirement savings vehicle available after an employer-sponsored retirement plan such as a 401(k). • The popular Roth IRA is the better option for anyone who qualifies. Most of the tax-related work is done for you by the brokerage. – Check for account minimums – Check to see if the broker charges an IRA account fee. Some do, and the service they provide is worth paying for, but some don't, and why pay if you don't have to? Source: Motley Fool’s “How to Start Investing” Guide, Fidelity. com

Roth IRA requirements Requirements • Earned income equal to your IRA contribution (or greater) • But less than $95 k (Regular IRA has no max on income) • Parents can fund (but you still need earned income) How much you can put in – Up to $4 k per year – If possible, invest in 07 and on 1/1/08 Source: SWS Dec. 13, 2006 presentation by Jamie Harmon, Fidelity Investments

Why invest in a Roth IRA? • - Advantages Compounds tax free Can be withdrawn tax free - But, can only withdraw after you reach 59 ½ years old • Save money from age 20 to 65 – 4 k per year for 45 years at 8% = $1, 669, 704 • What if you wait 1 year? – 4 k per year for 44 years at 8% = $1, 542, 022 – You lose $127, 682 !!! Source: SWS Dec. 13, 2006 presentation by Jamie Harmon, Fidelity Investments

managing your account

Opening your account • Although IRAs require some additional paperwork, opening a brokerage or mutual fund account is just like opening a bank account. Fill out a form and send them your money. – Remember, you don't have to invest right away. You can put your money in a money market fund and let it rest a while before it's put to work in an index fund or stocks, and you'll probably be earning more in the money market account than you got in your savings account. – Once you get to the site, you can print out the application forms, sign them, enclose them in an envelope with a check to initially fund your account, and you'll receive confirmation of your ability to start trading in pretty short order. • Making trades: You generally go to the broker's website and log on with your account number and password. You can then check quotes, view your portfolio and account balance, and, if you like, make a trade. – If you've never placed a trade over the Internet before, you might want to choose a brokerage that offers phone trading -- just in case. A phone trade will cost more, but you also get to pick the brain of the broker. After that, the next time you trade, the online form probably won't seem so intimidating. Source: Motley Fool’s “How to Start Investing” Guide

Placing orders • There are many different types of orders that you may be able to place. The most common is a “market” order, but there also “limit” orders, “stop” orders, and more. Be aware that there may be different fees for different types of orders. Buying Market Order Selling Buy at the best available Sell at the best available price Limit Order Buy below or at a certain price Sell above or at a certain price Stop Order Buy at a specified price, which is currently above the market price. Sell at a specified price, which is currently below the market price. Source: insightstockpicks. com

Examples of different orders • Market order – Instead of buying the stock at a specific price, you buy at the market, which means that your order gets filled at whatever price the stock is trading at when the order reaches the market maker. The advantage of market orders is that your order will almost always be filled. The disadvantage is that the price you end up paying may be considerably higher than you expected to pay. • Limit order – A trader wants to buy a stock that is now trading at $8. 25, but he want to pay only $8. 00. If he enters a market order, he will get filled at $8. 25 So he enters a "buy limit order" at $8. 00. If during the day the stock begins to trade lower and hits the $8. 00 price, his order will be filled. – A "sell limit order" works in reverse. The stock is again trading at $8. 25 and the trader wants to sell at $8. 50. He would then enter a sell limit order for $8. 50 and his order will be filled if the stock price rises to $8. 50 or higher during the trading day. • Stop order – A stock has traded as high as $10. 00. You only want to buy the stock if the price rises above that price. You would enter a buy stop at $10. You would be filled if the price of the stock reaches $10. 10, but would not be filled if the price stays below the $10. 10 price. – A sell stop order is just the opposite. You want to sell a stock but only if the stocks price falls significantly below the current level. A stock is trading at $10. 00 and you believe it will continue higher. However to protect yourself if you are wrong in your analysis, you enter a sell stop at $9. 50. If the price falls to the $9. 50 level, your stock will be sold. Source: insightstockpicks. com

Starting to invest • Some important considerations to keep in mind – Your income and financial needs – Your risk profile – Market movements (the “herd”) • Building your portfolio – Diversification – Taxes Source: SWS Nov. 15, 2006 presentation by John Copeland, Lehman Brothers

What you need • Temperament • Savings • Research – Spend more time buying stocks than shoes

research resources

Online resources • Resources for up to date stock news: – Google Finance (finance. google. com) – Yahoo Finance (finance. yahoo. com) – CBS Marketwatch (marketwatch. com) – Reuters (reuters. com)

Research online • Your broker should have access to research reports • You can also look up the following free investment research sites: – Zacks Investment Research: www. zacks. com – Motley Fool: www. fool. com – Seeking Alpha (blog): www. seekingalpha. com • SWS also publishes our research (done by your classmates!) online: – http: //www. smartwomansecurities. com/research. html

More educational resources • Websites – Motley Fool’s Guide to Investing http: //www. fool. com/school/basics. htm – Investopedia. com – Fidelity’s Trading Knowledge Center • Newspapers/Magazines – Financial Times – Wall Street Journal – Business. Week • Books – Peter Lynch’s “One up on Wall Street”

SWS • Furthermore, SWS has tons of educational resources consolidated on our website: – Click on Educating > Other Resources • www. smartwomansecurities. com

Joining SWS • Again, mention of comp process, application, etc.

Q&A