Huh?

There are two different types of option contracts: Puts and Calls

Puts are guarantees from one investor to buy stocks at a certain price from another investor.

Calls are guarantees from one investor to sell stocks at a certain price to another investor.

Example Put:

Let’s say I own 100 shares of XYZ currently at $25.00 per share. I read in the news that some bad stuff might be happening and I am worried that XYZ’s stock might fall. I don’t want to sell XYZ because the actual market reaction to the news hasn’t been negative yet, but I do wish that I could somehow hedge against financial ruin if the stock price drops. So instead I buy a put from another investor. This put guarantees that I can sell XYZ to the seller of the put for a strike price of $17.00 per share if it reaches or falls below that amount. I’ve paid a premium for this contract so if XYZ doesn’t reach $17 I’m out my premium, but if it falls below $17 I can actually make more money exercising the put than I would have selling it in the open market.

Example Call:

I own 100 shares of ABC currently at $20 per share and it is really doing well. I think I want to buy more, but I’m concerned that this isn’t the right time. I wish that I could wait and see if it goes up in value but not actually have to pay the increased price in order to buy it. Enter a call option. In a call option, I pay a premium for the chance to buy ABC at a strike price of $25 a share. I can watch ABC go up in value and, when it hits $26 or $27 a share, I can exercise my call option and buy it for only $25.

This turkey's no turkey.

In our trend obsessed society, it’s sometimes easy to adopt a system of beliefs because… well… everyone else is doing it.

Think about it, going green is easier now that it’s popular because everyone is selling green grocery bags, recycle bins, home composters and rain barrels. But when “going green” falls out of favor it will become more difficult and only those with a die-hard desire to live sustainably will continue.

Right now, being frugal is the cool thing to do. It’s like one-upping society when you find a good deal, score free stuff and sock away a little savings-but it wasn’t always this way.

In boom times, before the world experienced its financial falling-out, keeping up with the Jones’ was the cool thing to do. There was a time when, if your neighbors bought an Escalade, you might counter with the purchase of a Hummer. If your neighbors just put in a pool, you might raise the bar by turning your backyard into a tropical retreat. When home values were rising so fast, people kept refinancing and taking out more, more, more and keeping that 100% LTV. During that era, people who were frugal were looked upon with wonder, pity and not just a little bit of scorn.

This year, as the economy starts to improve, you may notice frugality falling out of favor. I truly believe that the secret to a financially sound future is frugality and I hope you will out your own priorities ahead of society’s and stay frugal—even when you don’t have to.

While some people will stick to their budget this year and emerge in 2011 more financially stable, the majority will fall off the budget bandwagon some time around March.

If you recognize the symptoms of a failing budget, you can stop it before it goes too far.

6 Sure Signs Your Budget is in Danger

1. You made your budget in Excel or some other electronic spreadsheet and you’re beginning to spend a lot of time moving things around to accommodate purchases you want to make/have made.

2. You are following your budget, “by memory.”

3. You created a general budget without breaking down categories like, bills, savings and entertainment into more defined subcategories.

4. You are not following up with your budget periodically to hold yourself accountable and to see what is and isn’t working (and why).

5. You still have a hard time getting your lips around the word, “No.”

6. Your budget says you will contribute a set amount each month to retirement, college and emergency savings, but you refuse to set up automatic drafts and transfers to make sure the contributions are…well…contributed.

So take control today and make sure you avoid all of the above budgeting mishaps by committing to yourself and your budget, holding yourself accountable, taking the budget seriously and learning how to say, “No.” (Hint: It rhymes with foe.)

CDSC stands for Contingent Deferred Sales Charge. All it means is that it is a deferred sales charge that is contingent on some action by you. So, it is a sales charge that is not charged when you buy a mutual fund, life insurance policy or annuity but instead is charged if you break the contract by selling the mutual find or surrendering the life policy or annuity within a certain time period—usually 5 or fewer years after buying it.

CDSC charges usually have a sliding scale percentage amount between 1% and 5%. The earlier you sell the mutual fund or surrender the annuity/ life policy, the higher the CDSC you will pay. After 5 years there is generally no more CDSC and you can sell/surrender without penalty.

The reason behind the penalty is that the insurance company or mutual fund wants to keep your money working for them as long as possible. When you sell, they can no longer make money from your money. The penalty works to encourage you to keep it with them for at least 5 years by which time they have hopefully made some profit on it.

Please keep in mind that every contract and mutual fund is different and this is just a general guideline.

Jennifer

Hi Jennifer,

Your question is a great one, possibly for more reasons than you know.

First, exchanges are places where stocks get traded–like the New York stock exchange, London exchange, etc. Now, the Nasdaq is an exchange, but the S&P is not. I think what you are actually asking (and correct me if I am wrong) is…what is the difference between the Dow, S&P, Nasdaq and all those other indexes (really it’s indices).

An index is set up to measure the performance of the overall market each day. Basically, you take a bunch of stocks and monitor their performance coming up with a weighted average and then you assume based on your sample that it is an appropriate indication of the direction of the entire market. So, if the Dow is up you assume most stocks will be up that day.

The difference between these indices is the amount and type of stocks they are made up of. The Dow is the most popular index and is made up of only 30 stocks. These 30 stocks are large companies, they range in industry and are widely held–so they are traded by many people. The S&P is made up of 500 stocks. Because it has more stocks, the S&P is able to represent a wider range of sectors than the Dow.  You’ll notice that the S&P does not generally move as….um….hugely as the Dow which, to me, makes it a more accurate assessment of what your individual portfolio will do on a particular day.

Later,

Yo

This question has been eating at me for over a year. I got laid off in February 2008 and ended up with a 403(b) with approximately $2500 in it. The money is sitting in some account managed by people called ————. It’s just sitting there and when I get my statements I see that the amount isn’t going up or down, which leads me to believe that it isn’t invested anywhere. Though, my statements also say that the plan is “active.” Basically, I have $2500 that I don’t know what to do with. So… what do I do with it?

-Anon Ymus

Hey Anon,

It sounds like you never chose any underlying investments in the 403(b). Think of your 403(b) as a basket. From what it sounds like, your money is in the basket, but it’s not doing anything. That basket can hold annuities (fixed and variable) and mutual funds–but you have to direct which you invest in.

With the fees associated with annuities and the amount of money you have you could be better off in a mutual fund with a low expense ratio, but you’d have to compare the specific investments to be sure.

Your plan administrator should be able to send you some mutual fund information (you can also compare mutual fund expense ratios and historical performance on Morningstar). I would choose a no load fund so there is no charge to buy (that may be the default option in a 403(b) but I’m not sure) and look for expense ratios of less than 1.50% (it can be difficult to find a lower expense ratio in a no load, but not impossible). KEEP IN MIND–when you make the investment within the 403(b) you could be facing possible CDSC charges if you want to sell and take the cash (short term selling fees) and you will be exposed to market risk.

Later,

Yo

Why would they do such a thing? In one word: Fear.

The small investor (yeah, that’s you and me) is often afraid that they are missing out on some big opportunity to make loads of money, so they buy stocks that are trending up. The problem with this is they do so right about the time the stock is hitting its ceiling.

Then, because they are afraid of losing money, they start to sell stocks as they are trending down–even though they may very well come back up and it could be a better decision to buy more at that point.

So what is the answer to this conundrum? I’m afraid it is easier said than done.

The key is to take emotions like fear out of the mix when you make decisions about investing. Instead, play like the big investors do and think only about your objective and whether or not it is realistic for the positions in your portfolio to reach your objective in the time frame you have set.

I know it is hard to see your stocks rise and fall aggressively, but I have watched people sell out of secure, long-standing companies at a loss just because the stock fell. One month later, had they stayed in, they would have been showing a profit.

My own great example of this is AIG. If I had sold AIG when they did their reverse split and went as low as $8.22 a share, then I wouldn’t own any right now at $35.75 a share.

This line of reasoning doesn’t mean buy and hold everything forever, because there can be some indicators that a company is going to declare bankruptcy and you could lose everything–might as well sell at a loss but get some value–but it does mean to look objectively at your portfolio instead of emotionally.

Later,

Yolander

When you own a stock–the certificates are issued to you and the position shows up in your brokerage account–you are considered “long” the position. When you don’t own the stock, but you sell it anyway, you are selling short.

So, wait. How can you sell something you don’t own?

When you short sell, there is a window of time before you have to fulfill your promise to give the buyer the position. Let’s say you are bearish about AIG. That means you think the price of AIG is going to fall. You short sell one lot (100 shares) of it today at $26 and your buyer gives you $2,600. Then, you buy AIG before you have to fulfill your seller’s obligation.

If your bearishness is correct, you’ll be able to buy AIG for less than $26 a share and make a profit. If you are wrong, then you will lose money.

*I should clarify that this is Naked Short Selling. You can also borrow the shares, making this not naked.

Bonds have a par value/price–one bond is usually $1,000. On top of that, you have a coupon rate (which is the interest rate you earn on the bond and is referred to as yield also).

So let’s say you buy 5 GE bonds for $5,000 with a coupon of 10% (yeah, not unless it’s a junk bond….but it makes my math easier) and a maturity of 1.10.2010 (meaning you will get interest until then, and then you’ll get your $5k back).

You will get 10% interest on 5, $1,000 bonds.

Oh, but now your car broke down and you need some money to fix it. Interest rates have dropped, so your 10% coupon rate is very attractive to buyers of bonds. If you sell your 5 bonds, you can sell them for MORE than $1,000 each–and that is selling at a premium (your buyer is buying them at a premium).

Now….

Since your buyer is buying the bonds, let’s say for $1,100 each, while his or her coupon rate will remain the same, he will yield less because he paid more for the bonds. You had only paid $5,000 and got an income of $500 per year, yielding 10%.

Your buyer will be paying $5,500 and getting that same $500 income from the coupon rate, which reduces his yield to only 9% (broken up into a monthly yield this number would be much smaller).

Later,

Yo