The stock market is no longer the sole playground of the rich and famous, with an increasing number of part-time investors opting to dabble in trading. However, rather than sticking to conventional stocks and shares, the world of foreign currency trading is becoming an attractive proposition for many.

Foreign currency trading, or forex as it is more commonly known, involves betting on the movements of two different currencies against each other. A trader must pick which currency will rise and which will fall. If the market moves in the right direction, a profit can be earned. Predicting that one currency will rise is known as `going long` while the one that is predicted to fall is known as `going short`.

It is not possible to trade on the market directly, so every investor needs to find a broker to execute the deal. One of the major advantages of forex is that, unlike stocks and shares, brokers do not charge fees or commission. This may sound strange but they earn their money in a completely different way.

As mentioned above, each trade involves one currency going up and the other going down. The investor is in essence, buying the currency that they think will increase and then selling it when they close the deal. The reverse is true for the currency predicted to fall; the investor is selling it when the trade is opened, but `buying` it when the trade is closed. Each broker has two different prices, with one for buying and one for selling. The price an investor buys a currency for is known as the ask price and the amount they sell it for is known as the bid price.

There will be a bid and an ask price for each currency and the difference between the two prices is known as the spread. If you have chosen to go long, the ask price will be higher than the bid price and the reverse if you have opted to go short. This means that in order to make a profit, the market must move sufficiently for the bid price to move past the offer price and until it does that, you will not have made any money. The spread is how brokers make their money and finding one with a tight spread is one way to help maximize your chances of making a gain.

It is possible to trade with a wide range of currencies; most brokers offer up to 80 different pairings. However, the most popular ones to choose are the US dollar, the euro, sterling, the yen, Canadian dollar, Australian dollar and Swiss franc. These are known as the majors and are the most commonly traded currencies. Other currencies are known as the minors and there are those on the fringes, such as the Brazilian real, which are usually called `exotics`.

The forex market is truly a 24-hour one and only shuts for a few hours at the weekend. Because of the international nature of its trade, there is a huge amount of liquidity and there is no chance of the market being deliberately manipulated by rogue investors.

Forex offers huge potential for gains, but due to its volatility and rapid movements, it is possible to lose large amounts of money very quickly. For this reason, it is recommended to limit each trade to no more than 5% of your account balance and to use a stop-loss order. This is an automatic block that closes the deal as soon as the market reaches a certain level and can be a lifesaver when a currency takes an unexpected plunge.

Forex is a huge subject and it is recommended that anyone considering dipping a toe in should first thoroughly research the subject and practice before entering a live market. However, with patience and a willingness to learn, it can offer substantial returns, even when the economic outlook is not so rosy.

Guaranteed Investment Contracts

GICs for short, guaranteed investment contracts are fixed-income contracts issued by insurance companies as an investment option for 401(k) retirement plans. Another, more common, name for GICs is “stable value funds.” Like Certificates of Deposit, only tax-deferred, GICs pay a fixed-interest rate for a specified period of time (e.g. 3 to 5 years). Because they are backed by an insurance company, and not the federal government, GICs generally pay a higher return than CDs and other cash investments. Their return is lower than stocks, however, leading to criticism that they are inappropriate for long-term financial goals like retirement. These are popular for retirement savings among the most conservative investors.

Money Market Mutual Funds

Money market mutual funds are a type of mutual fund consisting of high quality, short-term debt instruments such as Treasury bills and short term corporate IOUs. Like all mutual funds, money market mutual fund (MMMF) portfolios are professionally managed and a management fee is charged against fund assets to cover this expense. MMMFs offer market-based rates and are quick to respond to changing conditions because the average maturity of securities in their portfolio is 90 days or less. The minimum initial deposit is set by individual investment firms and can range from $250 to $25,000. MMMFs can be purchased directly from investment companies or with the assistance of financial advisors. The factor that makes these popular for retirement savings compared to CDs is that money market funds are totally liquid, just like a checking account.

Unlike bank-sponsored money market deposit accounts (MMDAs), there is no FDIC insurance if a MMMF fails to maintain a $1 share price. Failures have happened very infrequently in the last 20 years, however, and most investment firms have shored up MMMF prices with other company assets to avoid a loss of principal by investors. Limited check writing is generally available on MMMFs with a minimum amount (e.g., $250) per check. Investors seeking both safety of principal and tax advantages can select tax-exempt MMMFs that include short-term securities issued by state and local governments. Other conservative choices are MMMFs that invest solely in Treasury bills and/or Treasuries plus debt of federal government agencies.

Bank CD — Certificates of Deposit (CDs)

Also known as “time deposits,” certificates of deposit (CDs) are an insured bank product that pays a fixed rate of interest for a specified period of time (e.g., 18 months). These are favorites for retirement savings among seniors because of their safety. Typical CD maturities range from seven days to five years, with higher rates of return paid on CDs with longer maturities. A penalty is assessed if funds are withdrawn prior to maturity, resulting in the loss of a certain number of days of interest (the amount varies among financial institutions). If an early withdrawal penalty exceeds the interest earned, the difference will be deducted from an investor’s principal.

Many people think that CDs can only be purchased at banks. However, many credit unions and full-service brokerage firms also sell federally insured CDs, thereby catering to seniors’ retirement savings needs. Investment firms purchase the CDs of banks nationwide in large blocks and sell them to investors in small denominations. The difference between their buying and selling price, called “the spread,” is how they make a profit. Since brokers shop the entire country for high yields, brokered CDs often pay more attractive rates than CDs at local banks. CDs can be redeemed prior to maturity, often without penalty, but, due to interest rate risk, the value of a brokered CD can be higher or lower than someone’s initial investment.

Another options for retirement savings, a relatively new type of CD, is the equity-indexed CD. Sold through both banks and brokers, these CDs base returns, in part, on appreciation of a stock market index like the Standard & Poor’s 500 (S&P 500). Many require a $5,000 initial investment ($2,000 for IRAs). Unfortunately, equity-indexed CDs rarely include the full appreciation potential of the S&P 500 because they exclude the portion derived from company dividends. Many also cap the maximum growth rate, which further reduces upside potential. As a result, most financial advisors suggest avoiding these CDs and buying regular CDs for income and a stock index fund for capital growth.

Make more from your investments by trading covered calls
If you’re getting started in option trading, covered calls are usually one of the first new strategies you’ll encounter. They’re also popular with experienced traders looking to earn extra income from their portfolios. Writing covered calls is thought one of the lowest-risk strategies for option trading, and can be used in IRAs and non-margin accounts. Five different levels of options trading exist, based on account value and experience with trading. Covered call writing is a first-level strategy, so anyone with a brokerage account can be approved for it.

Identification
A call option is a contract that gives the holder the right to buy the underlying stock at a specific price for a set period of time. The trader who sells the call must be able to deliver the stock if the option holder exercises the contract. A covered call trade involves buying the stock and selling call options against the shares purchased. The purpose of a covered call trade is to collect the option premium as income and possibly make a small capital gain on the stock.

Function
An example can illustrate how a covered call trade works. Let’s say Coca-Cola stock is trading for $53.66 per share. The call option with a $55 strike price that expires in two months is trading for $1.80. The covered call trader enters a trade to buy 100 shares of Coca-Cola and simultaneously sell one call option contract. The cost of the trade is $5,366 for the stock, and the trader receives $180 for the option contract for a net cost of $5,186 plus commissions. If Coke is below the $55 strike when the option expires, the trader keeps the $180 and can write another call option against the stock. If the stock value is above $55, the option will be exercised, the stock will be called away, and the trader will receive $5,500.

Potential
Potential covered call returns are calculated for two possibilities: if the stock remains unchanged, and if the option is exercised and the stock called away. In our example, the result if unchanged is the option premium received divided into the total cost, or 3.4 percent for the two-month period. If the Coke stock, increases the total return will include the gain on the stock from $53.66 to $55. In this example, the return if called is 6.05 percent. The covered call trader wants to repeat this trade four to six times per year, earning 20 percent or better on the invested capital with relatively low risk.

Considerations
Covered call writing works best in a flat to slowly rising market. The profit potential of each trade is limited to the return if called, and the downside is very large if the stock declines significantly. Selecting covered call candidates involves finding stocks with good short-term prospects and near-term call option values that make the trade worthwhile. The covered call trader should have several stocks under consideration so that he can pick the one with the most potential when it is time to trade. Covered call traders must be ready to quickly unwind a trade where the stock starts to fall. One bad trade can wipe out the gains of several winning covered call positions.

Additional Tips
Brokerage commissions can have a significant effect on the final return of covered call trades. Option trades are usually a flat rate plus a fee per contract. The effect of commission can be reduced by using a broker who specializes in options trading and offers lower rates. Also, trading lots of 300 shares plus 3 option contracts or more reduces the effects of commissions. Your brokerage order screen will allow you to enter covered call trades as a net cost. Use this feature plus a limit price to squeeze the bid/ask spreads for a better net cost to enter the trade. The implied volatility of near-the-money call options is a rough estimate of the expected annual return of writing covered calls on the underlying stock. Higher volatility offers higher returns and a higher risk of loss.

After working in executive management for over ten years with a steadily increasing salary, Rick Stephens, 51, was laid off from his job in June 2008. Two years of steady unemployment later, he has sold his car, moved in with his 75-year-old father and blown through all his retirement savings to stay afloat.

“I pay my bills with what is left of the savings I accumulated by being frugal all my life, but I’m going through that pretty fast,” he said. “I have tapped my IRA, and the result of that is I will be heavily taxed on it next April. I honestly believe that there will be no recovery from this. If there is a recovery, it will be too late for me, as I will have exhausted my savings and my retirement that I had socked away by not living the high life.”

Stephens’ predicament is an increasingly common one. Aside from stagnant wages, soaring unemployment and plummeting home values, the major tragedy of this recession is the havoc it has wreaked on the retirement incomes of millions of Americans who have planned and saved their entire lives, only to watch that money drain out of their accounts much sooner than they anticipated.

Retirement statistics are grim. The percentage of American workers who said they have less than $10,000 in savings grew to 43 percent in 2010, according to a recent survey by the Employee Benefit Research Institute. Nearly a quarter of the workforce said they have postponed their planned retirement in the past year and a CareerBuilder.com survey reports that 61 percent of workers say they are now living paycheck to paycheck, as compared to 43 percent in 2007.

With rapidly dwindling savings and fewer opportunities for jobs than their younger counterparts, many older Americans are facing a very uncertain economic future.

“This is the undiscussed explosive bomb in all this, is all the pension benefits, all the 401(k) money that’s been drained out by workers trying to stay afloat until they find a job,” Rep. Jim McDermott (D-Wash.) said, “There are a lot of people who, when this is over, are going to have nothing. They will have lost their house, they will have used all their pension money.”

Many Americans seem to be losing hope. Only 16 percent of respondents to the EBRI survey expressed confidence in their ability to retire comfortably, the second lowest point in the 20-year history of the survey.

Marguerite DiGaetano, 58, says she is confident that after two years of solid unemployment, despite having worked her whole life, she will never be able to retire.

“I think the person who invents the cubicle where you can discreetly hang your walker where it doesn’t trip anybody, that person will be very popular with the baby boomers,” she said. “Who’s gonna be able to retire at 65? That’s only seven years away. Not me. I’ll be working until I die.”

You’ll be able to contribute more tax-free money to your 401(k) next year, the IRS just announced.

The contribution limit for employees participating in pension plans including 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan will be $17,000 for the tax year 2012.

That’s $500 higher than the $16,500 limit this year, and marks the first increase since 2009. The reason? Inflation.

Pension contribution limits aren’t the only amounts the agency has boosted due to the increased cost of living.

Starting in 2012, taxpayers will also be allowed to claim personal exemptions of $3,800 — up $100 from 2011.

The new standard deduction will be raised by $300 for married couples, by $150 for singles and by $200 for heads of household. Tax bracket thresholds will also be higher for 2012.

The maximum Earned Income Tax Credit is $5,891 for 2012, up from $5,751 in 2011. And the qualifying income limit has been boosted as well — to $50,270 in 2012, from $49,078 this year. Several other tax benefits — including the foreign income deduction and the annual deductible amounts for Medical Savings Accounts — will also go up.

Other benefits, including the additional standard deduction for blind people and senior citizens, remain unchanged.

Many senior citizens will be helped in another way next year, however. Social Security recipients will receive a cost of living adjustment of 3.6% starting in January — the first raise in three years.

While there’s usually nothing wrong (and a lot right!) with having a positive and optimistic outlook on life, when in comes to your personal finances such optimism may not be a great idea.

No one knows this better than Wall Street executives. When the top brass fail to deliver the results that they promised — even if it was a lowball promise — the backlash can be brutal. Consider:

Financial executives know the wisdom of this approach well. When they fail to deliver what they commit to–even if it’s a low-end commitment–the resultant backlash can be devastating. For example:

Dry bulk shipper DryShips (DRYS) saw its shares drop more than 12% intraday after reporting results in late August that were significantly below estimates. In late August, OmniVision Technologies (OVTI), indicated that it expected to take in around $255-$275 million in its second quarter. Analysts had expectations of more than $300 million. Boom — just like that shares plunged roughly 30%. On a more positive note Sirius XM (SIRI) posted revenue results slightly below analysts’ estimates. However, it made up for this on earnings, which were roughly triple those expectated. The company’s shares, which had closed at $3.11, opened the next day at $3.18.

For most companies, a few shocking earnings reports won’t totally make-or-break their financial futures, and stock movements don’t always last for long. However, such examples do suggest, as Seneca and Benjamin Franklin both agree, that there’s something to be said for actually planning for the worst and then being pleasantly surprised when you’re able to beat expectations.

Promise Less and Deliver More

The best approach with financial matters is to hope for the best but plan for the worst; in other words, underpromise and overdeliver.

What does this look like in practice? Well, start with the knowledge that the stock market, over much of the past century, has averaged about 9% or 10% annual returns. But that’s no guarantee of future performance, and many expect the coming decades to feature a lower average.

When calculating what you need for your nest egg, build in conservative estimates. Instead of 10%, use 6%. Lower returns mean you’ll most likely have to save more; find out how much more. (Think of the “interest rate” as the rate at which you expect your investments to grow.)

For example, if you have $50,000 socked away and you expect to add $5,000 annually and earn 10% over the coming 25 years, you’ll end up with about $1.1 million, which might provide for a pleasant retirement. But if you expect to earn just 6%, your $50,000 and $5,000 additions will amount to only $505,000, less than half as much. Adjust your annual investment to $10,000 and presto — you can expect to accumulate nearly $800,000.

Even if you end up averaging an even lower return, by having increased your investment amounts, you’ll end up with more money than you would have originally. And if you end up with 10% returns or more, great! You’ll be able to live higher off the hog in retirement, or will be able to leave more to your heirs.

Prepare and plan for a challenging few decades ahead, and your portfolio may surprise you by growing larger than you expected. By underpromising your growth rate to yourself, you set your nest egg up to have a good chance of overdelivering.

Here’s what you need to keep in mind:

• Minimums matter. Many brokerage firms won’t let you open an account with less than $1,000, and some have minimums as high as $15,000. The minimum requirements for retirement accounts often are lower, however, so you may be able to open a traditional or Roth IRA with less. But shop around. You can find a broker with a low or no minimum.

• Fees matter, too. Your returns easily can be wiped out by the fees many brokerages levy on small or lightly traded accounts. Before you commit your cash, ask about account or maintenance fees, IRA custodial fees, inactivity fees (if you don’t make a minimum number of trades each year) and costs for common activities, such as transferring money or closing an account.

• Consider alternatives. Dividend-reinvestment plans, or DRIPs, allow you to invest as little as $10 a month, and many plans don’t charge fees. Sharebuilder, for example, allows small investors to purchase partial shares by combining orders and purchasing stocks in blocks. ShareBuilder has no account minimums and no maintenance fees.

What’s not so important? Just about everything else.  Unfortunately, your choices are limited until you build up a bigger stake.

Sometimes mutual fund investing is not as simple as it sounds. Lots of people buy a fund for their retirement portfolio and hope the performance is good enough they can retire one day. This is a losing strategy. You don’t just want to leave retirement planning to chance. In order to help you select the right mutual funds for your retirement, you need to avoid making the same mistakes that other investors make. Over the next week, I will take a look at the biggest mistakes that fund investors make.

Mistake Number 1: Figuring that a fund is good because you have heard of the fund company

Fund companies typically sell hundreds of different funds on a daily basis. A fund company could have several funds that are solid investments and several other funds that are money losers. You have to do your homework first to make sure that you are buying mutual funds that are making good use of your money and not just placing your investment capital.

Take Fidelity Funds for example. Fidelity is a name brand fund company that lots of investors have heard of. Since Fidelity has name recognition, investors may be tempted to place their money in any mutual fund and start reaping the rewards of capital appreciation. That would be a mistake.

If you had purchased this Fidelity Fund over the past decade, you would have lost money. Your $10,000 investment would now be worth just $8,400 over the past 10 years. That is significantly less than what you had started with.

Fidelity Growth & Income (FGRIX)

Conversely, if you had purchased this fund over the past decade, you would be sitting pretty. Your $10,000 investment would now be worth $26,000. You would have actually increased your investment capital.

Fidelity Capital & Income (FAGIX)

It’s amazing how close the names are of the Fidelity Growth & Income Fund and the Fidelity Capital & Income Fund. The fund’s investment objectives, portfolio composition, and results however have been drastically different. Mutual funds can have similar names but have totally different performance results.

Generic terms like growth stock fund or bond fund can represent a whole number of different investment styles. One fund manager may think that a growth stock fund means a portfolio of large cap names like General Electric, Apple, and Nike. Another fund manager may deem small cap companies like Buffalo Wild Wings, Great Wolf Resorts, and Blackboard as growth stocks.

That is why you need to do your research before investing. Look at the five year and ten year historical performance of the fund. Check out the investment holdings of the portfolio. Do the assets in the portfolio look overvalued to you? Is there still growth left in this portfolio? Those are just a few of the questions you should ask when trying to distinguish one fund from another in the same fund family.

Remember that every fund company has winning funds and losing funds. There are always some investors keeping losing funds in business with their money. Any fund can have a bad year but if your mutual fund has had a bad five to ten years, you need to abandon ship.

Warren Buffett is a billionaire investor, a businessperson and one of the humanity’s greatest philanthropists. He is also the second or third richest man in the world and a guru to millions of investors of all flavours.

His philosophy of value investing has been shown conclusively to work in all types of markets and financial environments, and has never gone out of style. Following his simple strategies, he has built the holding company Berkshire Hathaway to an investment vehicle with a market value of $196 billion. As the largest shareholder and CEO, his net worth is about $52 billion. Warren Buffett made his reputation as the “world’s greatest investor” by taking the long view, buying quality stocks with good earnings power and staying with them through both bull and bear markets. Here’s his simple investment advice:

• Is the company in an industry with good economics, rather than in an industry that competes on price.
• Does the company have a consumer monopoly or brand name that commands loyalty?
• Can any other company with an abundance of resources compete successfully with it?
• Are the earnings on an upward trend with good and consistent margins?
• Is the debt-to-equity ratio low or is the earnings-to-debt ratio high? This means that the company can repay its debt even in years when earnings are lower than average.
• Does the company have a high and consistent return on invested capital?
• Does the company retain earnings for growth?
• Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
• Is the company free to adjust prices for inflation?
• He also asks at what price is the business a bargain. The answer is when it provides a higher rate of compounded return relative to other available investment opportunities.

What do you think of Warren’s advice? Can you see how you can use it in your own investments? Let us know below.

I’ve been investing for years; I’ve made money and lost money. More importantly than that, I’ve seized and missed opportunities. Probably the biggest mistake would-be investors make is missing opportunities when they are evident. An even bigger mistake investors make is running after a train that has already left the station. There are four key things that all would be investors should do before taking the plunge into the world of the stock market.

1) Observe: I’ve met a lot of people who seem weirdly casual about their investing (“it’s only money!”) If that,s you, then you know, great; however most of us want to have some kind of return on our money and don’t just lackadaisically flush it down the tubes. If you’ve got any interest in investing the best thing you can do is to get yourself familiar with the industry. Learn the language, watch CNBC, read the business section of the paper, go to Borders and look at the investing books and magazines (heck; why not get crazy–support a writer and buy one!), see what other people say. You’ll begin to hear a lot of the same stuff being said. One of these ‘oh too common’ themes are that many young investors…

2) Aren’t In it to Win It: Many times what new investors will do is see a phenomenon (one which comes to mind is Google), watch as it goes up for a while, and then buy into it. As soon as there’s any dip in the price, they panic and sell out (usually at a loss). You’ve got to know what you’re investing in and you’ve got to appreciate that what you’re investing in will at some point go down. Fluctuate is what prices do. But if you catch onto a shooting star and then sell out prematurely at a loss, no one wins. And you’re very likely to have the experience of looking back at a stock three months later to find its price has corrected.

3) Don’t Spend What You Can’t Afford to Lose: If you’re considering getting into the market with your lunch money or next month’s rent money (or last months rent money!), you should not be in the market. Money in the market needs to be able to be invested for the long haul (barring unforeseen emergencies, for at least 6 months) to have the of opportunity to do something real. Yes, there are exceptions; we all saw movies like Wall Street. Fortunes can be won and lost on a whim. Unfortunately that’s not the great majority of cases.

I like to think of investing like baseball: while there are seasons of glory for even underdog teams, in the large majority of cases, even underdog teams have, at their core, good fundamentals and good management and that’s what carries them through. It’s the same with investing: while there is the occasional hot streak, good fundamentals and good management win out in the long run every time.

4) Jump Right In: In the end, the only thing you can do is give it a shot. You can try any number of times, but if you sit too long on the sidelines, it’s easy to end up second-guessing yourself into inertia.

Investing is a great thing for anyone who is interested in learning about making money and anyone who is interested in learning about how markets function. Whether you’re investing in a small money market, Roth IRA through your employer, mutual funds, or actual stocks there are myriad risk levels and potential returns. But you need to get yourself familiar with the territory before you start out. You of course eventually need to get in or move on with your life and do other things with your money, but those Manolo shoes aren’t going to fund your retirement in 40 years. (They likely won’t even be in your closet anymore.)

Just sayin’!

Hi everyone,

James back again. The last few posts dealt with using stock options for defensive purposes. This mean that you used them in order to protect your portfolio against potential loss — not to make additional money by trading options. The other use for stock options is termed to be “speculative” — meaning that you are buying a call or put option in order to profit off of the trade. When you think a stock is going to go up a lot and quickly, then buying a call option on it is the way to maximize your profits. Conversely, if you believe that a stock will decline rapidly, then purchasing a put option is the best way to profit. Put options are also safer than selling short a stock which you are bearish on — short selling can entail unlimited losses. A put option only subjects you to the loss of the amount paid to purchase the put.

I should make it very clear — both call and put options are very risky. The odds are that you will lose all of your investment into them. However, in the instances where your thesis proves correct, options can pay off hugely. It is highly advised that you trade options on a practice account for several months and study them well — prior to risking actual money on these trades. Adding put and call options into your trading arsenal allows you to capitalize on situations where you’re either exceedingly bullish or bearish on the prospects of a given company. However, as indicated, make sure you fully understand how stock options work prior to entering this highly risky arena.

James

I last discussed protecting your stock portfolio with married puts, and now we’ll explore protection via covered calls. Covered calls are when you sell a call option against a stock you own. This defensive move is not as secure as a married put, but instead of paying for the put — you make money on the call. Furthermore, a covered call position gives away a lot of the upside, whereas a married put does not. Say you own stock in ABC and it is trading at 30. You are nervous about holding your ABC shares fearing it might decline. Married puts would entail you buying a put — say with a 25 strike price — on ABC. Consequently, you are only exposed to loss down to 25, and any further loss is covered with the put. This ensures you can’t lose more than 5 dollars from its current price. Alternatively, if you desired to sell a covered call, you would sell a 35 strike call on ABC.

This means you are giving away all upside over 35 — should the stock go up. However, if you collected $3 by selling the call, this means that you are protected against the first three dollars of decline. Any further decline would fully felt versus a married put which entails no further risk — even if the stock goes to zero. These concepts might seem complex at first blush, however, with a little research you can understand them in no time. There are a plethora of reputable and free sources of information about defensive stock option strategies online — researching this technique can end up saving you a large part of your retirement funds.

James