A dividend investment program, also known as DRIP, is a program that allows investors to use their cash dividends as a reinvestment into more shares or fractional shares on the payment date of the dividend. Simply put, you are able to invest into large companies for a low price. Let’s look at a further explanation…

You can purchase shares from a choice company directly without the need of a stockbroker. Your investment of the shares then expand and grow as the dividends are reinvested into the choice company, which then enhances the amount of shares that are owned.

DRIPS are a great way for an investor to increase their investment value. Many of these programs allow investors to purchase shares at a commission free base. Sometimes, you can find shares at a lower cost than the current share price. In addition, investments can be on a regular basis and can range anywhere from as small as $10 to $500,000 at any given time. You can make the investments on a weekly basis, quarterly basis, etc. How frequently you make the investments are ultimately up to you as the investor.

Now that you know how DRIP programs work, let’s take a look at the benefits of dividend investment programs so that you know why you should invest in such a program.

DRIP programs allow you to invest into just one share of a company to begin with. The reason for this is that you must own a share within the choice company in order to qualify for the dividend investment program.

Now, all investments into DRIP programs are commission free due to the fact that a stockbroker is not required to make the trade possible. This is excellent for average or below average investors as most of the time, these investors don’t have the money to spend on the cost of a broker.

Most DRIP programs allow the optional cash purchase of supplementary shares from the company directly at a discounted rate (anywhere from about 1% to 10%) with no fine print fees.

Since dividend investment programs are so flexible, investors are able to change the amount that they invest based off of their current financial situation. That means if you can afford $100 one month, but $500 the next month, then that’s fine. As stated above, you can make investments as small as $10 as large as half a million dollars.

In addition, some DRIP programs will allow investors to purchase stock at a discounted rate from the current stock market price. The discount can range anywhere from as little as 1% to as much as 10%. If an investor outside of a dividend investment program purchased shares, the investor would be looking at a significantly higher price since the shares wouldn’t be commission free and without the discount.

Finally, DRIP programs also utilize a concept known as dollar-cost averaging. This is when the price is averaged out so that you never purchase stock when it is at its low nor when it is at its peak and it averages out over long periods. Ultimately, you’ll purchase more stocks when the price is near its low and less when its near its high; however, in the end, it averages out to be somewhere in the middle of all that.

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If you’ve looked in to investing at all in the last ten years, I’m willing to bet you have considered a mutual fund at one point or another. Mutual funds are a very popular investment option, especially in these tough financial times when diversifying your portfolio is not just a luxury but a must.

While there are a lot of excellent benefits to investing in mutual funds the trickiest part can be trying to figure out what funds are available so I thought I would take this opportunity to talk about some of the basic types of mutual funds that there are out there.

Essentially there are three types of mutual funds, and literally thousands of individual funds within each. These three types of funds are equity or stock funds, bond funds and money market funds. Each have their own pros and cons so let’s take a look at each in a little more depth.

Equity Mutual Funds

Equity mutual funds are the most common type of funds that invest primarily in stock investments. There are literally as many types of stock funds as there are stocks (probably more if you count all the combinations you could put together). Because stocks are riskier than bonds and money markets, equity funds are naturally more risky than bond funds and money market funds.

Within the equity funds category there are many different sub-categories of funds. Growth stock mutual funds focus on the stocks of large companies with an eye toward long term capital gains while income funds focus more on short term income and consist of stocks that pay regular dividends. You can also find more specific funds that focus on an entire sector, one type of company or even more specialized types of funds that invest exclusively in socially responsible and/or environmentally friendly companies. As you can tell the options with equity funds are pretty much endless.

Bond Funds

Bond funds focus in, well… bonds! I’m sure you figured that out by the title but if not I’m here to help. There are a lot of different types of bonds from government issued treasury or agency bonds, local government municipal bonds and corporate bonds issued by individual companies. Within each type of bond there are different risk levels, obviously the government bonds are safest and bonds issued by risky corporations (also known as junk bonds) amongst the riskiest.

Money Market Funds

Money market mutual funds are the safest of the three primary types of funds. They consist of low risk investments like treasury bills, CD’s, commercial paper and other forms if extremely low risk investments. As you can imagine the lower the risk the lower the return on investment so you won’t make a lot of money on this type of investment but you would have a tough time losing your investment as well. This isn’t to say you can’t lose your investment though as ALL investments have risk.

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Even though the proud among us may not admit to it, the stock market is a challenging place to be as an investor whether you are a new to its ins and outs or not. The stock market can be quite complex if the investor has no background or idea as to what is going on. Moreover, superficial knowledge in this area does not make one an expert. The stock market can be approached from several angles. In an attempt to produce some guidelines for those with no background in trading stocks, the first most basic option that anyone has with regards to investing in stocks is to go to a broker, give him your hard earned cash and hope he invests it wisely.

The second option would be to invest on the advice of a friend that seems to be doing well in the field. While the third option would be to learn about the stock market on your own and then start investing in it. The book, The Stock Market for Dummies falls under the third category and is a good place for the would-be investor to begin. This book contains great information and is the first in a series where the author gives a run down on how to navigate this world that is the stock exchange. From the onset, the main agenda of the book is to teach the newbie the ins and outs of the stock market. This would make it a great starting point for all those that may not be interested in all the jargon associated with the stock exchange.

The introduction of this book is a good place to begin in order to get all the basic information you need on the stock market. The Stock Market for Dummies deals with how to invest in the market starting with picking the right broker all the way to buying the different stocks available on the market. The more one knows about the basics of the stock market the better they will be at investing in it.

This book also teaches the new stock market investor how and when to buy and sell stocks as well as when to hold on to them. Another advantage to this book is that the reader learns what to do in the different situations that present themselves during their tenure on the stock market. The Stock Market for Dummies is an excellent gift to give anyone that is considering investing in stocks for the first time. The book has enough information to keep both investor and anyone considering being a stock broker as a career in the loop with regards to the stock market.

For anyone that is interested in the stock market but has no background in its workings, this book is the place to start your education. The Stock Market for Dummies, is for all those that are interested in the stock market and all that pertains to it.

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If you’ve ever watched a financial television show, read a newspaper or had a conversation about investing you surely have heard of mutual funds, after all mutual funds are basically the backbone of today’s retirement investment portfolio but do you really understand what mutual funds are and how they work? Most of us don’t.

Essentially mutual funds are a type of investment where you, and thousands of other investors, put your money together in one big pool to be managed by a professional investor known as a fund manager. The fund manager will then take that pool of money and invest it in a variety of stocks, bonds and other investments that they think will make you a return on your investment. Because of this most financial advisers will recommend mutual funds for beginners who have never invested or are fairly new to investing.

Advantages of Mutual Funds

For the average investor it can be tough to buy more than one stock, or at least a handful of stocks, and when it comes to diversifying your portfolio that doesn’t do you much good. As most of us realized over the last few years diversification is the key for not taking a beating when the stock market crumbles for a few years.

Mutual funds on the other hand allow you to invest in many stocks, bonds or other types of investments without having to buy each stock individually. Most funds are literally invested in thousands of securities, some in specific sectors, some in specific types of companies, but typically the risk is spread out across a variety of risk levels and sectors to help you get the diversification you need.

Another advantage of mutual fund is while you may not be sure what stocks or bonds you want to invest in, investing in a mutual fund allows you to generally choose a type of investment but let the fund manager (who generally has a lot of investing experience under their belt) choose the specific investments for you, and choose when to buy more or sell off in a specific security at the right time.

Disadvantages of Mutual Funds

Mutual funds aren’t perfect, in fact no investment is perfect and you need to remember that investing your money in anything could eventually mean you lose it all (If you’re really risk averse just go bury it in a jar in the backyard), but that said Mutual Funds, when chosen correctly, eliminate some risk.

Another disadvantage goes hand and hand with what I said earlier about the fund manager managing your money. Since the fund manager doesn’t call you when he/she buys or sells a security, you have a certain loss of control in your investment. If you’re someone who wants to manage your own finances 100% then mutual funds may not be right for you.

As mentioned earlier since mutual funds diversify your investment across a number of types of investments this can also minimize your return in a good economy but the trade off is safety for your investment. You can always change funds to a more specific fund at a later date but remember the more specific your fund gets the more risk you take on.

Overall mutual funds are certainly a worthwhile investment for a lot of investors and there are thousands of options out there, some good and some bad. As always be sure that whatever you invest in that it matches your investment needs and risk tolerance and you will be sure to find the right mutual fund for your portfolio.

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If you have been planning to buy an annuity, and you have bullish opinions about the way the stock market is going to be priced between now and the time you begin to receive your annuity payments, you may want to consider equity indexed annuities.

How Equity Indexed Annuities Work

The equity indexed annuity is a simple concept. The annuity is linked to a stock market index like the S&P 500. If the price of the S&P 500 rises over time, interest rates will rise in line with it. If the price falls, there will usually be a guaranteed minimum annuity payment which will not be reduced even if the market lowers below what it was when you paid your annuity premiums.

Advantages

-The linking of an annuity’s interest to a specific stock index is the main reason for purchasing the annuity. If the stock market rises rapidly, your annuity will also see high gains. Bullish markets mean bullish returns on equity indexed annuities.

-Linking the interest rate of the annuity to the stock market means that real goods and their associated market prices are the basis for the annuity rate. If inflation rises, the stock market will also rise, meaning that your future annuity payments are hedged against the risk of inflation.

Disadvantages

-Can offer little to no growth in times of slow market growth. If the market fails to grow or has a negative return, you may see no increased return on your payment, which means you will actually lose your money to inflation over time.

-Can be confusing for people with little knowledge about the stock market and its potential for growth. Be sure to inform yourself on the potential of various indexes out there and make a decision for yourself or get advice from an expert financial planner on which index to associate your annuity with.

Caps

As mentioned above, there is usually a guaranteed minimum annuity payment even if the market dives below what you paid premiums into the annuity for. In order to ensure that the insurance company doesn’t only experience the negative side of risk, but also gets the positive side, they often put a cap on the interest that can be earned per year.

For example, if the S&P 500 grows by 15% in a year, but there is a cap of 10%, then the future annuity payment will only have grown by 10% and the insurance company will pocket the other 5%.

Caps are an important factor to consider when purchasing an annuity, because they limit the maximum amount of growth you may see in your annuity. If you can get a guaranteed fixed annuity for 7%, and there is a capped equity indexed annuity available for 8%, it may make more sense to buy the fixed annuity since it has no risk and the equity indexed annuity would offer little return (an extra 1%) in exchange for greater risk.

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Investing for College Students

For a number of college graduates who have just entered the career or job markets, many of them are already strapped with debt from their 4 years they spent earning their degree. The average college graduate today launch their careers with literally no cash flow. This is due to a number of circumstances including the following:

• credit card debt
• no money saved while in college
• school loans which become due once you have graduated

Not only is this a widespread problem, it is a growing one. Additionally, during economic downturns like the current one we have been experiencing since the beginning of the 4th quarter in 2008, this makes finding a job and launching your career even more difficult.

Changing the current mentality is critical

It should be obvious that changing the above involves changing the overall mentality of those students who are entering college so that this process can be reversed. Although it is easier said than done, the only way to correct this is to save money while you are in college rather than spending your way through your education. Additionally, and if you do things right, you might be able to do some investing towards your own future in the process.

Flexibility is the key when you are starting out

What you want to remember where investing for a college student is concerned is that you need to be flexible with the different investments you decide to make. It’s a given that most college students today like flexibility where saving any money is concerned. This is especially the case because of the extreme cost levels of an education that currently exist. Fortunately, banks and other financial institutions have recognized the necessity of offering financial products that are flexible enough to accommodate a college student.

4 essential investment strategies for the college student

The following is a list of the 4 primary recommendations that we advise where college students and investing towards, their future is concerned:

Open a FREE interest-bearing checking account – this is by far the most flexible type of account you can open if you can qualify for one. It allows you to deposit or withdraw your funds any time you want so your account is readily accessible.

Open a savings account – despite the fact that most standard savings accounts today are only paying 1% to 3% interest, this is still a smart and very safe idea for what to do with your money. There is virtually no risk of losing your money and if you keep depositing money without ever withdrawing any, you will be surprised at how that small interest rate has increased the value of your investments.

Consider either a CD or a Money-Market account – although not every entry level college student has the financial means to do this, those who do have the means to do so should consider this. Just like with a standard savings account, if you can discipline yourself well enough so that you never touch these while you are pursuing your degree, you will be amazed at the rewards that will be waiting for you when you finish college.

© Investing for College Students

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Welcome to the February 21, 2010 edition of best finance articles carnival. In this carnival we are featuring the best finance articles from some of the best money and finance blogs on the web. Without further adieu, here are the best of the week.

Matthew Paulson presents Homeowners Frustrated with Bank of America Loan Modifications posted at American Consumer News.

David de Souza presents Tax Rebate Forms ? Tips and Advice posted at UK Tax Blog, saying, “Some tips and advice for when you complete your tax rebate forms this year.”

BWL presents When Can You Withdraw From Your Traditional IRA? posted at Christian Personal Finance, saying, “A look at the rules from withdrawing from your IRA…”

The Investor presents Pros and cons of being wealthy posted at Monevator.com, saying, “We all think we’d like to be rich. Are we wrong?”

Mike Piper presents Index Funds: Are They Really Passive Investing? posted at The Oblivious Investor, saying, “Index funds are known as passive investment vehicles, but can you really just “set and forget” with them?”

FIRE Getters presents Want To Be A Millionaire? Follow the YAWN Philosophy posted at FIRE Finance.

Jason presents Introduction to Budgeting Personal Finance posted at Budgeting Personal Finance.

Patrick @ Cash Money Life presents Roth IRA Withdrawal Rules posted at Cash Money Life, saying, “Do you know what constitutes a qualified or non-qualified Roth IRA distribution? Find out how you can make tax and penalty free Roth IRA withdrawals.”

Patrick @ Military Money presents Why Military Members Should Open Roth IRAs posted at Military Finance Network, saying, “Military members have 3 distinct advantages when opening Roth IRAs, including possible tax free contributions, time extensions to contribute, and low current tax brackets.”

Thank you for everyone who submitted your articles, they were all excellent reads and we look forward to hosting more of these in the future. If you would like to host the Best Finance Articles Carnival please fill out the contact form or email jeff [at] beforeyouinvest [dot] com.

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ETF’s For Beginners: What are ETFs?

What are ETF’s and why are they a great solution for the individual investor? To begin to answer this question, it is important to know that ETF stands for exchange traded funds. It is somewhat similar to a mutual fund. However, exchange traded funds are handled much more like a traded stock. Many of these are index funds that are based on some of the different markets.

ETF’s for beginners getting involved in the market can be confusing but they are also a good investment for the right investor. It is very safe to say that there are not many people that can pick out winning individual stocks or handle an active mutual fund. By using an ETF, you do not have to determine individual stocks much you begin to become involved in the different indices and trying to match those indexes.

The bonus is that an ETF has many of the same characteristics of a mutual fund. It gives you the variety and the diversity of a portfolio that many people investing in the market are looking for. It will also have much less risk than picking individual stocks that may not perform. You can still invest in some of the areas that you are interested in, but by using the ETF you are investing in the areas index as opposed to the individual company. This will help to protect you if one particular company is not performing well, but this sector as a whole may be performing very well.

The ETF’s also have several other benefits over individual stock picking as well as mutual funds. Since you are only performing one transaction, you will not have some of the fees associated with performing a variety of transactions. This will not only save you some money, but it will also save you time as well. It is also considered that the ETF will have the ability to perform slightly better than mutual funds. You can also expect to not have to incur as many fees as a mutual fund will incur. A mutual fund that is actively managed may have more than 2% worth of fees. The ETF fees can be between .25% and .75%. As you can see, this will help to reduce the amount of fees that you have to pay.

Investing in ETF’s also allows many more people to participate (see: how to invest etf). There are normally not the same type of minimum requirements as with a mutual fund. Sometimes a mutual fund may require a minimum of $1000 or more. To become active in the ETF, you will not experience those kinds of minimum dollar amounts. Since the ETF does not have to be bought and sold as often as a mutual fund, you should expect to pay less in taxes. Mutual funds are traded a lot more frequently and are subject to more taxes.

ETFs have become a much more popular area to invest in. There are hundreds that you can choose from, and many investment firms will be able to help you get started. There are many online investment companies that offer ETF’s for you to invest in.

© ETFs For Beginners: What are ETFs?

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How to Get Started Investing: Establishing An Investment Strategy

One thing that can safely be said about investing either online investing or investing with a broker or brokerage is that you don’t have to be a millionaire, or inherit some huge sum of money to get started. You would be pleasantly surprised how investing with little money can amount to a decent retirement saving over the long haul as long as you start early and you have a plan that is tailored to an investment strategy that makes sense for your financial situation.

The primary reason that people procrastinate about investing (or saving for that matter) is because they feel that they do not have the money to stash away for “just in case” thinking they might need it down the line. Most individuals would be amazed at just how little money we actually need each month. Before you get started investing though, you just have to remember a few significant aspects about getting involved in the stock market.

First and foremost, never invest more than you can afford to lose. Additionally, you never want to use your day-to-day living money which enables you to maintain your current quality of life. Just remember that sometimes, common sense mandates walking away from what you think may be a viable opportunity if it might ultimately spell financial disaster for you and your family in the long run. Educate yourself first if you have no experience investing. I know I just made half of your cringe, but when it comes to investing there really is no better way to keep your money safe than to simply just do your homework. I know, I know we all want a hot stock tip that will make us rich for the rest of our lives but for most of us this will never happen. A critical rule of thumb is to trust no one until you have done your homework. Rely on your true instincts and intuition before you ever invest your hard earned cash.

Establish an Investment Strategy

I’m often asked for an investment strategy for beginners who have never invested so much as a dollar in the stock market. Well there is no one right investment strategy for everyone because it really all depends on you and your financial situation, risk factors, how close to retirement you are, etc. There are a number of approaches you can take where how to get started investing online is concerned. The following 3 steps will hopefully help you get started on the right path:

Establish your investment strategy – forget about getting rich overnight. That’s just not going to happen most of the time, especially if you are going to rely on investments for survival. The element of risk is extremely high with many investment vehicles so you need to remember what was discussed above about never investing more money than what you can afford to lose. Just like planning a budget – you need to develop an investment strategy and stick with it for the long term. Long term investment strategies are the only way to go in the stock market, if you’re looking to get rich quick buy a lotto ticket.

Set aside money specifically for investing – Most of us hate saving money, and believe me I’m no different, but I find that when I have money in my pocket I spend it and when I don’t I don’t spend it. If you can set aside money for investing every month or every paycheck do so, if you can’t trust yourself get it direct deposited in an account for investing only. I would recommend against borrowing money from family and especially against borrowing from a credit card. Understanding where your money is coming from is critical for your investment strategy, without it you can’t make any investment income right? What’s critical here is that you consider what amount of money your budget will bear and keep that investment money separate from your “living” money so you don’t spend it on something frivolous.

Monitor and manage your investments – this is critical to achieving your investment goals, regardless of what you are investing in. For those of you who know who Jim Cramer is, he always recommends “buy and homework” instead of “buy and hold” and he is absolutely right. This stage of the investment process is not a “invest in it and forget about it” process, you need to be vigilant in monitoring your portfolio and make sure all of your investments stick with your investment strategy. Your financial future and livelihood depends on intelligent decisions, and investing is no exception to that rule. Educate yourself every time you have the opportunity to do so where investing in the different options are concerned.

© How to Get Started Investing: Establishing An Investment Strategy

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Online Investing for Beginners

Online investing or internet investing is essentially self-directed investing from the comfort of your own home or office (for those of you who like to surf at work). In other words, you make the decisions to buy and sell stocks, mutual funds, bonds or whatever without a broker’s assistance. Since the onset of the internet, online investing has become extremely popular in the financial industry whether for the low commissions, online advice or you just don’t like your financial planner trying to sell you on an investment you don’t want. Whatever your reasons, more and more individuals are handling matters on their own without the assistance of an actual broker or brokerage. It has become so commonplace that now that even the big brokerages are offering an online investing and trading platform for their clients.

Unfortunately for the big brokers more and more investors are looking to the internet for their investment portfolio and the brokers that charge the super high commissions for offline trades are becoming a thing of the past. Before internet investing you would have to either meet your broker face to face at their office or contact them by phone in order to do any investing or trading. Suffice it to say, the internet has provided us with a major money-saving and time-saving convenience in the process.

Online Investing Tips

Is online investing right for you? Here are a few things to consider before investing online:

Consider your tax liabilities before you ever invest – a primary consideration is the amount of tax that you want to be liable for. Whenever you are considering any type of investing, you should contact your accountant or income tax preparer to hear their advice or suggestions about the matter.

Trust is everything – never believe everything that you read about an investment broker or brokerage, especially if you are considering online investing.

Keep bank accounts separate – you should always separate your investment accounts from your personal (or family) checking and savings accounts. It enables you to monitor those accounts much easier.

Use online payment processors – there are numerous options for paying for your investments online, but it is always recommended that you employ a payment processor for this. There are a number of trustworthy options that you can search out online.

Play with house money – in other words, once you have recouped your initial investment, you should withdraw the funds you invested initially and let the gains do their job compounding. The mentality here is that you are now investing what is referred to as OPM (Other People’s Money) and not your own. The worst case here is you break even right?

Don’t use your “living” money to invest online – the #1 rule of thumb with investing, whether through a broker or online is to never invest money that you cannot afford to lose. Although the temptation to use whatever funds are available, you should never interrupt the monthly cash flow necessary to maintain your lifestyle.

Be patient – patience has always been a virtue, especially where investing is concerned. No matter what your broker urges you to do, or what opportunity seems to be enticing, exhibit patience – especially if things go wrong or the market slows down. Remember not to panic when this happens. Sometimes those bumps in the road are only temporary and are not financially disastrous.

© Online Investing for Beginners

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