Keeping track of stocks is probably the most problematic task you will ever undertake with Money. Merely figuring out what a short sell is, not to mention a margin buy and a stock split, is hard enough to begin with. How can you record these strange events in an investment or retirement account register?
Recording a purchase of stocks
When you purchase shares of a stock, follow these steps to record the purchase:
1. Click the Investing tab.
2. In the Investing window, click the Investing Tools button and choose Portfolio Manager from the drop-down menu.
The Portfolio Manager window appears.
3. Click the Work with Investments link, and then choose Record a Buy from the drop-down menu.
You see the Edit Transaction dialog box.
4. On the Inv. Account drop-down menu, select the name of the investment or retirement account where you want to record the purchase of the stock shares.
5. In the Date text box, enter the date you purchased the stocks.
Be sure to enter the date correctly. Money needs this date to calculate the stock's value over time.
6. In the Investment drop-down menu, click the arrow and select the stock from the drop-down list.
If this is the first time you have purchased shares of this stock, you see the Create New Investment dialog box.
7. Select Buy from the Activity drop-down list.
New text boxes — Activity, Transfer From, Quantity, Price, Commission, and Total — appear for describing the stock purchase.
8. In the Quantity text box, enter the number of stock shares that you purchased.
When you enter share prices of stock, you can enter fractions. For example, you can enter 50-1/2 or 10-1/4. Money converts the entry to a decimal.
9. In the Price text box, enter the price per share of the stock.
10. In the Commission text box, enter the commission (if you paid one).
The amount in the Total text box should now equal the total purchase price for the stock that is listed on your statement. If the amount isn't correct, review your statement and enter the correct quantity, price, and commission.
11. Click OK.
The purchase of the stock is entered in your account register.
Recording the sale of stocks
Except for the problem of lots, recording the sales of stocks is pretty simple. A lot is a group of securities purchased at the same time for the same price (and also a nephew of Abraham whose wife got turned into a saltshaker, but that's another story). Suppose that you buy 10 shares of Burger Heaven at $10 per share in January, and then buy 10 more shares of the same company at $20 per share in February. In March, you sell 15 shares. How many shares you sell from the $10 lot and the $20 lot is important in determining how much profit you make and how much you have to pay in capital gains taxes. Fortunately, Money can help you decide which shares to sell.
To see which stock lots you have purchased, click the name of the stock in the Portfolio Manager window. You see a miniregister with recently made transactions, as shown in Figure 9-5. Click the More Investment Data button in the miniregister, and choose View Lots from the pop-up menu. As shown in Figure 1, the View Lots dialog box shows you which lots you purchased and how much you paid for the stock in each lot.
Figure 1: Finding out whether you purchased stock in lots.
Follow these steps to record the sale of stock shares:
1. Click the Investing tab and, in the Investing window, click the Portfolio Manager link.
You land in the Portfolio Manager window.
2. If necessary, click the name of the account where you track the stock you want to sell.
To see the name of stocks and other investments in an account, you click the account's name, unless the investment names are already displayed, in which case you don't have to click an account name.
3. Click the name of the stock you sold.
A miniregister showing recently completed transactions appears.
4. Click the Work with Investments link, and then click Record a Sell on the submenu.
As shown in Figure 2, the Edit Transaction dialog box appears. Because you selected the stock you are selling in Step 3, the correct Inv. Account, Investment Name, and Activity options are already selected. However, if you want, you can bypass Steps 2 and 3 by clicking the Work with Investments link and choosing Record a Sell on the submenu. You see the Edit Transaction dialog box straightaway, but you have to choose an Inv. Account and Investment Name in the dialog box.
Figure 2: Selling a stock.
5. In the Quantity text box, enter the number of shares that you sold; enter the price per share in the Price text box.
6. If a commission was charged on the sale, enter the amount of the commission in the Commission text box.
Money enters the total amount of the sale in the Total text box. If the figure is incorrect, double-check the Quantity and Price text boxes to make sure that you entered the numbers correctly.
7. Click OK.
An Advisor FYI Alerts message box informs you whether you need to pay capital gains taxes or the sale resulted in a capital loss. The proceeds from the sale are deposited in your investment or retirement account.
That's all there is to it — unless you purchased the shares in different lots. In that case, you see the What Shares Should I Use? dialog box after you click OK. Unless you tell it otherwise, Money assumes that you want to sell the shares in the lot that you purchased first. To do that, simply click the Finish button.
6.12.2008
Accumulating the Down Payment to Buy a Home
You've finally found your dream home and you're already imagining how to decorate it, how your parties will be fabulous, and how your family will love it. Back to reality: After going through all of the loan documentation requirements and closing costs, you soon discover that you can't afford to buy the house because you haven't saved enough. Don't let this happen to you.
The 20 percent solution
Ideally, you should purchase a home and have enough accumulated for a down payment so that your down payment represents 20 percent of the purchase price of the property. Why 20 percent and not 10 or 15 or 25 or 30 percent? For the same reason that Goldilocks, at the residence of the three bears, liked the moderately warm bowl of porridge and disliked the bowls of porridge that were very hot and stone cold.
Twenty percent down is the magic number because it's a big enough cushion to protect lenders from default. Suppose, for example, a buyer puts only 10 percent down, then property values drop 5 percent, and the buyer defaults on the loan. When the lender forecloses — after paying a real estate commission, transfer tax, and other expenses of sale — the lender will be in the hole. Lenders learned the hard way that buyers are far less likely to default on and walk away from a home on which they pay 20 percent down. Lenders don't like losing money. They found they are far less likely to lose money on mortgages where the borrower has put up at least a down payment of 20 percent of the value of the property.
If, like most people, you plan to borrow money from a bank or other mortgage lender, be aware that almost all require you to obtain (and pay for) private mortgage insurance (PMI) if your down payment is less than 20 percent of the purchase price of the property. Think of the mortgage lender as Goldilocks — the person who needs to be satisfied. Although PMI typically adds several hundred dollars annually to the cost of your loan, it protects the lender financially if you default. Should you buy an expensive home — into the hundreds-of-thousands-of-dollars price range — PMI can add $1,000 or more, annually, to your mortgage bill. (You can also expect worse loan terms such as higher up-front fees and/or a higher ongoing interest rate on a mortgage when you make a down payment of less than 20 percent.)
PMI is not a permanent cost. Your need for PMI vanishes when you can prove that you have at least 20 percent equity (home value minus loan balance outstanding) in the property. The 20 percent can come from loan paydown, appreciation, improvements that enhance the value of the property, or any combination thereof. Note also that, to remove PMI, most mortgage lenders require that an appraisal be done — at your expense.
Ways to buy with less money down
"But I can't save a 20 percent down payment plus closing costs. What do you think I am, a professional athlete?!"
Digging out from consumer debt and saving 20 percent of a property's purchase price as a down payment plus closing costs can seem like a financial mountain —especially if you're just starting to save or are still paying off student loans or worse.
Don't panic and don't give up. Here's a grab bag filled with time-tested ways to overcome this seemingly gargantuan obstacle:
Boost your savings rate. Say that you want to accumulate $30,000 for your home purchase, and you're saving just $100 per month. At this rate, it will take you nearly two decades to reach your savings goal! However, if you can boost your savings rate by $300 per month, you should reach your goal in about five years.
Being efficient with your spending is always a good financial habit, but saving faster is a necessity for nearly all prospective homebuyers. Without benevolent, loaded relatives or other sources for a financial windfall, you're going to need to accumulate money the old-fashioned way that millions of other homebuyers have done in the past: by gradually saving it.
Trim excess spending, stick to a budget, and begin saving as early as you can.
Set your sights lower. Twenty percent of a big number is a big number, so it stands to reason that 20 percent of a smaller number is a smaller number. If the down payment and closing costs needed to purchase a $150,000 home are stretching you, scale back to a $120,000 or $100,000 home, which should slash your required cash for the home purchase by about 20 to 33 percent.
Check out low-down payment loan programs. Some lenders offer low-down-payment mortgage programs where you can put down as little as 3 to 10 percent of the purchase price. To qualify for such programs, you generally must have excellent credit and purchase private mortgage insurance (PMI). In addition to the extra expense of PMI, expect to get worse loan terms — higher interest rates and more up-front fees — with such low-money-down loans. Check with local lenders and real estate agents in your area.
Unless you're champing at the bit to purchase a home, take more time and try to accumulate a larger down payment. However, if you're the type of person who has trouble saving and may never save a 20 percent down payment, buying with less money down may be your best option. Be sure to shop around for the best loan terms.
Look into seller financing. Some sellers don't need all the cash from the sale of their property when the transaction closes escrow. These sellers may be willing to offer you a second mortgage to help you buy their property. In fact, they often advertise that they're willing to assist with financing. Seller financing is usually due and payable in five to ten years. This gives you time to build up equity or save enough to refinance into a new, larger 80-percent conventional mortgage before the seller's loan comes due.
Be cautious about seller financing. Some sellers who offer property with built-in financing are trying to dump a house that has major defects. It's also possible that the house may be priced far above its fair market value. Before accepting seller financing, make sure that the property does not have fatal flaws (have a thorough inspection conducted) and is priced competitively. Also, be sure that the seller financing interest rate is as low or lower than you can obtain through a traditional mortgage lender.
The 20 percent solution
Ideally, you should purchase a home and have enough accumulated for a down payment so that your down payment represents 20 percent of the purchase price of the property. Why 20 percent and not 10 or 15 or 25 or 30 percent? For the same reason that Goldilocks, at the residence of the three bears, liked the moderately warm bowl of porridge and disliked the bowls of porridge that were very hot and stone cold.
Twenty percent down is the magic number because it's a big enough cushion to protect lenders from default. Suppose, for example, a buyer puts only 10 percent down, then property values drop 5 percent, and the buyer defaults on the loan. When the lender forecloses — after paying a real estate commission, transfer tax, and other expenses of sale — the lender will be in the hole. Lenders learned the hard way that buyers are far less likely to default on and walk away from a home on which they pay 20 percent down. Lenders don't like losing money. They found they are far less likely to lose money on mortgages where the borrower has put up at least a down payment of 20 percent of the value of the property.
If, like most people, you plan to borrow money from a bank or other mortgage lender, be aware that almost all require you to obtain (and pay for) private mortgage insurance (PMI) if your down payment is less than 20 percent of the purchase price of the property. Think of the mortgage lender as Goldilocks — the person who needs to be satisfied. Although PMI typically adds several hundred dollars annually to the cost of your loan, it protects the lender financially if you default. Should you buy an expensive home — into the hundreds-of-thousands-of-dollars price range — PMI can add $1,000 or more, annually, to your mortgage bill. (You can also expect worse loan terms such as higher up-front fees and/or a higher ongoing interest rate on a mortgage when you make a down payment of less than 20 percent.)
PMI is not a permanent cost. Your need for PMI vanishes when you can prove that you have at least 20 percent equity (home value minus loan balance outstanding) in the property. The 20 percent can come from loan paydown, appreciation, improvements that enhance the value of the property, or any combination thereof. Note also that, to remove PMI, most mortgage lenders require that an appraisal be done — at your expense.
Ways to buy with less money down
"But I can't save a 20 percent down payment plus closing costs. What do you think I am, a professional athlete?!"
Digging out from consumer debt and saving 20 percent of a property's purchase price as a down payment plus closing costs can seem like a financial mountain —especially if you're just starting to save or are still paying off student loans or worse.
Don't panic and don't give up. Here's a grab bag filled with time-tested ways to overcome this seemingly gargantuan obstacle:
Boost your savings rate. Say that you want to accumulate $30,000 for your home purchase, and you're saving just $100 per month. At this rate, it will take you nearly two decades to reach your savings goal! However, if you can boost your savings rate by $300 per month, you should reach your goal in about five years.
Being efficient with your spending is always a good financial habit, but saving faster is a necessity for nearly all prospective homebuyers. Without benevolent, loaded relatives or other sources for a financial windfall, you're going to need to accumulate money the old-fashioned way that millions of other homebuyers have done in the past: by gradually saving it.
Trim excess spending, stick to a budget, and begin saving as early as you can.
Set your sights lower. Twenty percent of a big number is a big number, so it stands to reason that 20 percent of a smaller number is a smaller number. If the down payment and closing costs needed to purchase a $150,000 home are stretching you, scale back to a $120,000 or $100,000 home, which should slash your required cash for the home purchase by about 20 to 33 percent.
Check out low-down payment loan programs. Some lenders offer low-down-payment mortgage programs where you can put down as little as 3 to 10 percent of the purchase price. To qualify for such programs, you generally must have excellent credit and purchase private mortgage insurance (PMI). In addition to the extra expense of PMI, expect to get worse loan terms — higher interest rates and more up-front fees — with such low-money-down loans. Check with local lenders and real estate agents in your area.
Unless you're champing at the bit to purchase a home, take more time and try to accumulate a larger down payment. However, if you're the type of person who has trouble saving and may never save a 20 percent down payment, buying with less money down may be your best option. Be sure to shop around for the best loan terms.
Look into seller financing. Some sellers don't need all the cash from the sale of their property when the transaction closes escrow. These sellers may be willing to offer you a second mortgage to help you buy their property. In fact, they often advertise that they're willing to assist with financing. Seller financing is usually due and payable in five to ten years. This gives you time to build up equity or save enough to refinance into a new, larger 80-percent conventional mortgage before the seller's loan comes due.
Be cautious about seller financing. Some sellers who offer property with built-in financing are trying to dump a house that has major defects. It's also possible that the house may be priced far above its fair market value. Before accepting seller financing, make sure that the property does not have fatal flaws (have a thorough inspection conducted) and is priced competitively. Also, be sure that the seller financing interest rate is as low or lower than you can obtain through a traditional mortgage lender.
6.11.2008
Covering Top Ways to Invest in Commodities
Because the commodities markets are so wide and deep, you have a number of investment vehicles to access these markets. A common misconception among investors is that you can only trade commodities by opening a futures account. While the futures markets certainly provide an avenue into the commodities markets, you have other tools at your disposal.
Futures Commission Merchant
Opening an account with a Futures Commission Merchant (FCM) is the most direct way for you to invest in commodities through the futures markets. An FCM is registered with the National Futures Association (NFA) and its activities are monitored by the Commodity Futures Trading Commission (CFTC). When you open an account with an FCM, you can actually trade futures contracts, options, and other derivative products directly through the main commodity exchanges. Your orders are sometimes routed electronically or are placed during the open outcry trading session. However, you should only open an account with an FCM if you have a solid grasp of trading futures and options.
Commodity Trading Advisor
A Commodity Trading Advisor (CTA) is authorized by the CFTC and the NFA to trade on behalf of individual clients in the futures markets. The CTA is a registered investment professional who has a good grasp of the concepts in the futures markets. However, before you invest through a CTA, you should research their track record and investment philosophy.
Commodity Pool Operator
The Commodity Pool Operator (CPO) is similar to the CTA in that she has the authority to invest on behalf of clients in the futures markets. The biggest difference is that CPOs are allowed to "pool" client accounts under one giant account and enter the markets en masse. The pooling of client funds offers two advantages: It increases the purchasing power of the fund and it provides additional leverage. In addition, because a CPO is usually registered as a company, you can only lose your principal (in case things go wrong). In other words, you won't get any margin calls and owe the exchange money.
Integrated Commodity Companies
The equity markets offer a way for you to get exposure to commodities by investing in companies that process these natural resources. Some of these companies include large, integrated commodity-processing companies. In the energy space, these are companies like ExxonMobil (NYSE: XOM) and Total (NYSE: TOT) that have exposure to crude oil and natural gas in both the exploration and distribution phase of the supply chain. In the metals complex, companies like Rio Tinto (NYSE: TRP) and BHP Billiton (NYSE: BHP) mine minerals and metals as varied as palladium and nickel.
Specialized Commodity Companies
If you want to get exposure to a specific commodity through the equity markets, you can always invest in specialized commodity companies. These companies focus on either one commodity or on one aspect of the supply chain. For example, oil tanker operators focus on transporting crude oil from Point A to Point B — that's the extent of their activities. Other such companies include Starbucks (NASDAQ: SBUX), which focuses strictly on selling and marketing coffee-related products. These are good companies to invest in if you want exposure to a specific commodity through the equity markets.
Master Limited Partnerships
Master Limited Partnerships (MLPs) are hybrid investment vehicles that invest in energy infrastructure. They are in fact private partnerships that trade on public exchanges, just like stocks. This unique combination provides several advantages. First, because the MLP is a partnership, it has tremendous tax advantages because it does not pay taxes on the corporate level, only on the individual level. It's therefore not subject to the double taxation that many corporations are subject to. Second, its mandate is to distribute practically all its cash flow directly to shareholders. It's therefore not uncommon to have an MLP return $3 or $4 per unit owned.
Exchange Traded Funds
Since they first emerged on the scene a few years ago, the popularity of Exchange Traded Funds (ETFs) has soared. And for good reason. They're privately run funds that trade on a public exchange, just like stocks. This ease-of-use has directly contributed to their popularity among investors. A number of ETFs have been introduced in recent years, which track the performance of commodity-related assets, such as gold, silver, and crude oil. But it's not just individual commodities that are now tracked by ETFs. Commodity indexes, such as the Deutsche Bank Liquid Commodity Index (AMEX: DBC), also has an ETF that tracks its performance.
Commodity Mutual Funds
Investors who are used to investing in mutual funds will enjoy knowing that a number of mutual funds invest directly in commodities. Two of the biggest such mutual funds are the PIMCO commodity fund and the Oppenheimer fund. Some funds seek to mirror the performance of various commodity benchmarks, while others invest in companies that process commodities.
Commodity Indexes
A commodity index acts a lot like a stock index: It tracks a group of securities for benchmarking and investing purposes. Commodity indexes are constructed and offered by different financial institutions, such as Goldman Sachs and Standard & Poor's, and they follow different construction methodologies. As such, the performance of the indexes — there are currently five — is different across the board. Most of these indexes can be tracked either through the futures markets or through ETFs.
Emerging Market Funds
Due to geographical happenstance, commodities are scattered across the globe. No single country dominates all commodities across the board. However, a few countries do dominate specific commodities. South Africa, for instance, has the largest reserves of gold in the world, Saudi Arabia has the largest oil reserves, and Russia has the biggest palladium reserves. As the demand for commodities increases, the economies of these emerging markets have been soaring. One way to play the commodities boom is by opening up your portfolio to emerging market funds.
Futures Commission Merchant
Opening an account with a Futures Commission Merchant (FCM) is the most direct way for you to invest in commodities through the futures markets. An FCM is registered with the National Futures Association (NFA) and its activities are monitored by the Commodity Futures Trading Commission (CFTC). When you open an account with an FCM, you can actually trade futures contracts, options, and other derivative products directly through the main commodity exchanges. Your orders are sometimes routed electronically or are placed during the open outcry trading session. However, you should only open an account with an FCM if you have a solid grasp of trading futures and options.
Commodity Trading Advisor
A Commodity Trading Advisor (CTA) is authorized by the CFTC and the NFA to trade on behalf of individual clients in the futures markets. The CTA is a registered investment professional who has a good grasp of the concepts in the futures markets. However, before you invest through a CTA, you should research their track record and investment philosophy.
Commodity Pool Operator
The Commodity Pool Operator (CPO) is similar to the CTA in that she has the authority to invest on behalf of clients in the futures markets. The biggest difference is that CPOs are allowed to "pool" client accounts under one giant account and enter the markets en masse. The pooling of client funds offers two advantages: It increases the purchasing power of the fund and it provides additional leverage. In addition, because a CPO is usually registered as a company, you can only lose your principal (in case things go wrong). In other words, you won't get any margin calls and owe the exchange money.
Integrated Commodity Companies
The equity markets offer a way for you to get exposure to commodities by investing in companies that process these natural resources. Some of these companies include large, integrated commodity-processing companies. In the energy space, these are companies like ExxonMobil (NYSE: XOM) and Total (NYSE: TOT) that have exposure to crude oil and natural gas in both the exploration and distribution phase of the supply chain. In the metals complex, companies like Rio Tinto (NYSE: TRP) and BHP Billiton (NYSE: BHP) mine minerals and metals as varied as palladium and nickel.
Specialized Commodity Companies
If you want to get exposure to a specific commodity through the equity markets, you can always invest in specialized commodity companies. These companies focus on either one commodity or on one aspect of the supply chain. For example, oil tanker operators focus on transporting crude oil from Point A to Point B — that's the extent of their activities. Other such companies include Starbucks (NASDAQ: SBUX), which focuses strictly on selling and marketing coffee-related products. These are good companies to invest in if you want exposure to a specific commodity through the equity markets.
Master Limited Partnerships
Master Limited Partnerships (MLPs) are hybrid investment vehicles that invest in energy infrastructure. They are in fact private partnerships that trade on public exchanges, just like stocks. This unique combination provides several advantages. First, because the MLP is a partnership, it has tremendous tax advantages because it does not pay taxes on the corporate level, only on the individual level. It's therefore not subject to the double taxation that many corporations are subject to. Second, its mandate is to distribute practically all its cash flow directly to shareholders. It's therefore not uncommon to have an MLP return $3 or $4 per unit owned.
Exchange Traded Funds
Since they first emerged on the scene a few years ago, the popularity of Exchange Traded Funds (ETFs) has soared. And for good reason. They're privately run funds that trade on a public exchange, just like stocks. This ease-of-use has directly contributed to their popularity among investors. A number of ETFs have been introduced in recent years, which track the performance of commodity-related assets, such as gold, silver, and crude oil. But it's not just individual commodities that are now tracked by ETFs. Commodity indexes, such as the Deutsche Bank Liquid Commodity Index (AMEX: DBC), also has an ETF that tracks its performance.
Commodity Mutual Funds
Investors who are used to investing in mutual funds will enjoy knowing that a number of mutual funds invest directly in commodities. Two of the biggest such mutual funds are the PIMCO commodity fund and the Oppenheimer fund. Some funds seek to mirror the performance of various commodity benchmarks, while others invest in companies that process commodities.
Commodity Indexes
A commodity index acts a lot like a stock index: It tracks a group of securities for benchmarking and investing purposes. Commodity indexes are constructed and offered by different financial institutions, such as Goldman Sachs and Standard & Poor's, and they follow different construction methodologies. As such, the performance of the indexes — there are currently five — is different across the board. Most of these indexes can be tracked either through the futures markets or through ETFs.
Emerging Market Funds
Due to geographical happenstance, commodities are scattered across the globe. No single country dominates all commodities across the board. However, a few countries do dominate specific commodities. South Africa, for instance, has the largest reserves of gold in the world, Saudi Arabia has the largest oil reserves, and Russia has the biggest palladium reserves. As the demand for commodities increases, the economies of these emerging markets have been soaring. One way to play the commodities boom is by opening up your portfolio to emerging market funds.
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