A mutual fund is a pool of securities (stocks, bonds, money market instruments, etc.) managed by an investment company or other professional and paid for by investors. Each share of a mutual fund contains a small piece of every different type of security in the fund (so when you buy a share of a mutual fund, you’re really buying a little piece of a stock from Company A, a little piece of a stock from Company B, a little piece of a government bond, and so on).
Archive for the ‘Level 1’ Category
A Mutual Fund is…
Wednesday, September 23rd, 2009What does it mean to say “the Fed is raising the interest rate?”
Wednesday, September 23rd, 2009At any given time, there are countless different interest rates for countless different transactions at countless different institutions. The government doesn’t control all of them – how could it? But then how can you say the Fed has raised or lowered interest rates?
The Fed, or the Federal Reserve, is the whole country’s bank. It operates out of 12 different locations and it lands money to commercial banks, which in turn land money to us. The Federal Reserve Board is the agency that controls this bank and its job is to maintain a secure financial system throughout the country. The Fed’s primary concern is to regulate our economy’s rate of growth – if the economy grows too quickly, we get swamped by inflation, and if it grows too slowly, we could enter a recession.
Because the Fed lands money to all other banks, its interest rate affects all other interest rates, which adjust to accommodate the Fed’s behavior. So when the Fed decides the economy is growing too fast, it raises its own interest rate – raising all other interest rates in a kind of domino effect – and slows down spending that way. If the Fed wants to try to increase economic growth, it lowers its interest rate, which usually increases spending. While interest rates can vary from institution to institution, they’re all proportional to the country’s most important interest rate: the Federal Reserve’s.
A Junk Bond is…
Wednesday, September 23rd, 2009A junk bond (also known as a high-yield bond) is a type of investment that is very risky to make, but it can lead to higher yields than safer investments. High-risk bonds got the name “junk” because of their low credit ratings (typically below Ba or BB).
Who picks the stocks that are in the Dow?
Wednesday, September 23rd, 2009The Dow gets its name from Charles Dow, the man who first created it in 1897. In the beginning, Mr. Dow made a list of the 11 most prosperous and most widely traded stocks on the market. Currently, the Dow is made up of 30 stocks, chosen by the editors of the Wall Street Journal (which is owned by Dow Jones and Company).
But what are the criteria for determining what the “best” stocks are? The stocks included in the Dow are generally from large, stable companies that are considered to be among the most successful, but there is a mathematical formula to go on. The basic formula involves adding up the prices of all the stocks in a given index (collection of stocks) of a particular corporation, then dividing by the total number of stocks in that index – in other words, finding the average price of a stock for that index. Today, however, the editors at WSJ actually divide by a higher number in order to adjust for stock splits (when a company multiplies the amount of shares it has).
Why do you need to keep records of your charitable donations?
Wednesday, September 23rd, 2009The government is prepared to award you tax deductions in return for your charitable donations, but it’s up to you to prove those donations were actually made. The IRS requires a great deal of documentation to ensure that all your donations are legitimate, so it’s essential to keep good records and make sure your chosen charities received everything you gave them. The specific requirements for tax deductions are as follows.
If your donation was money, you need to provide a credit card statement, canceled check, or bank statement that details how much, when, and to whom you donated, as well as written acknowledgment from the charity of how much you paid them and when. If your donation was more than $250, the acknowledgment letter should also include whether the charity gave you anything in return for your donation, and if so, the approximate value of the services rendered.
Property donations also get you tax deductions, but the records you keep have to be much more detailed. Every property donation can be tax deductible only if at least the following records are provided: the name and address of the charity, the date of the donation, a description of the property and its location, an estimated value for the property and how you arrived at that number, and the amount you want to be paid as a tax deduction. If the property is worth more than $250, there are even more rules:
- For property donations from $250-$500, you also need an acknowledgment letter from the charity.
- From $500-$5,000, you must document how and when you acquired the property, as well as how much it cost you.
- If you estimated the property’s value at more than $5,000, you need a qualified appraiser to verify your estimate.
It’s important to keep records of all of the above, as well as any additional documents that can help prove you actually made the donation. If any piece is missing, you probably won’t get any money back.
Interest is…
Wednesday, September 23rd, 2009Interest is the cost of borrowing money (or a benefit of lending money). When you deposit your money in the bank, the bank is essentially borrowing that money and paying you interest for it. Interest is usually expressed as a percentage per year.
A Seller’s Market is…
Wednesday, September 23rd, 2009A seller’s market is a situation in which demand for a good or service is greater than the available supply, so the seller has more power to dictate the terms of sale, including price. Let’s say everyone in New York City wants to buy an orange (gotta get that Vitamin C), but only a few stores actually sell oranges. Those stores that do sell oranges are able to hike up the sale price because people who want to buy oranges have nowhere else to go to get their fix. This is a seller’s market because the stores can sell the oranges for whatever price they want, and people will still buy them.
Why is there a limit to political giving?
Wednesday, September 23rd, 2009Campaign finance laws determine how much you’re allowed to give to a political candidate or party that you support. The limits placed on those contributions might seem unfair – how come you can’t give as much money as you want if you support a candidate? Candidates who get elected wield a lot of power: they write laws, hire companies for big government contracts, and make all sorts of decisions that affect your life and your business. When people give money to a campaign, they gain some influence over that candidate, who will tend to look favorably upon the desires of his biggest contributors because he wants to keep receiving their support.
If there were no limits to campaign contributions, certain people would have way more political power than others just because they have more money, which would undermine the very idea of democracy. Money gives people all sorts of additional power that people with less money don’t have and that is not necessarily a bad thing – money can create jobs or fund the arts or help lift people out of poverty. However, the political freedoms that make our vibrant, dynamic economy possible only exist because of our strong democracy which is based on the idea that all men (and women) are created equal. You only get one vote for a reason; campaign finance limits are just an extension of that same idea.
The Black Market is…
Wednesday, September 23rd, 2009The black market is the “marketplace” for anything that is illegal to buy or sell within a country. If you are buying something in a dimly-lit back alley, you are probably buying on the black market.
Should you give down the street or across the ocean?
Wednesday, September 23rd, 2009There’s no cut-and-dry answer for this. You should give to a cause you believe in because it makes you feel good and it’s the right thing to do. Giving to a local charity might be especially satisfying because you’ll more easily be able to see the results of your giving firsthand. However, if you can travel abroad and get involved in or at least see close-up the cause to which you choose to give, that could also be a worthwhile, gratifying experience.
The tax breaks you can get for making charitable contributions come with certain limitations. Foreign charities are not eligible for tax deductions, so you won’t save any money on your taxes if you donate to these charities. Many charities that do work in foreign countries are based in the United States and are still eligible.