The Dow Jones Industrial Average (or DJIA) gets its name from Charles Dow, the man who first created it in 1897. In the beginning, Mr. Dow made an index of the 11 most prosperous and most widely traded industrial stocks on the market. Currently, the Dow is made up of 30 stocks from all sectors of the market – not just industrial stocks. The companies in the current Dow index are chosen by the editors of the Wall Street Journal (which is owned by Dow Jones and Company). These stocks are intended to reflect how the largest U.S. companies are doing in the stock market.
Archive for the ‘Level 2’ Category
The Dow Jones Industrial Average is…
Wednesday, June 23rd, 2010The Sharpe Ratio is…
Friday, June 18th, 2010The Sharpe Ratio is a financial equation invented by Bill Sharpe, a recipient of the Nobel Prize For Economics. It serves as a rough guide to whether the ends justify the means in an investment (the higher the ratio, the better the risk-adjusted returns). In other words, whether the potential rewards from an investment justify the amount of risk involved.
Annuities are…
Friday, June 18th, 2010Annuities are contracts, or a form of investment, between two parties. The investor makes an investment and the financial institution (usually an insurance company) agrees to repay the investor, with interest, over different time intervals. Typically, you would make either one lump-sum payment or a series of payments to your insurance company, and in return the insurance company would pay back your investment at agreed points in time and an agreed interest rate. There are three types of annuities: fixed, variable and equity-indexed annuities.
An Escrow Account is…
Wednesday, June 16th, 2010An escrow account is a kind of “neutral zone” for people completing some monetary transaction. It’s a bank account that isn’t owned by anyone participating in the transaction, so the money doesn’t have to change hands until all the details have been hammered out. Putting money into an escrow account shows you’re serious about making the transaction, but it protects everyone in case the agreement falls through.
Escrow accounts are often used in real estate deals to prevent a client’s money from mingling with other funds. When the deal is closed, the money in the escrow account is transferred to its ultimate owner – in this case, the seller.
An Exchange-Traded Fund (ETF) is…
Monday, March 8th, 2010An exchange-traded fund (or ETF) is a fund that owns a basket of financial instruments (e.g., stocks or commodities) that reflect the composition of a market index (e.g., the Dow Jones Industrial Average). Somebody looking to buy ETF shares would do so the same way he or she would buy stocks, that is, on a stock exchange, with the help of a broker who charges a nominal fee.
You can postpone your taxes?
Tuesday, March 2nd, 2010In certain situations, you can actually put off paying your taxes until later – sometimes many years later – but methods of doing so are pretty complicated. Income whose taxes you can pay later is called tax-deferred, and the most common type of tax-deferred income is the money you put into a retirement plan.
Most retirement plans (IRAs, 401(k)s, Keogh Plans, and so on) allow you to make elective deferrals up to a certain amount. What does this mean? Under a retirement plan, you set aside a portion of your income every year and put it into a retirement account for use – you guessed it – after you retire. Think of it this way: as far as the IRS is concerned, the money you put into a retirement account essentially doesn’t exist until you withdraw it, which means the IRS isn’t going to tax that money until you withdraw it.
But you still have to pay the taxes eventually, right? Why not just pay them now and get it over with? The answer has to do with tax brackets. By the time you actually start using the money in your retirement account, your income may be lower. And if you’re in a lower income tax bracket when you withdraw the money, you’ll pay less in income taxes on that money than you would if you paid up when you originally earned it all those years ago. So in some cases, putting off payment can actually pay off.
Can we do this thing on an installment plan?
Friday, January 8th, 2010Maybe you like the idea of supporting your favorite cause on a regular basis, but you don’t want the hassle of sending them a check every four weeks. Luckily, some organizations have taken this complaint into consideration. With recurring donations, you can make sure your charity of choice gets a steady flow of aid without constantly having to remember to shell out the cash.
Recurring donations can be set up over the Internet, and they just require a credit card number, an email account, and a billing address. You select a charity and enter the amount you want to give each month (which can be changed or canceled at any time) and that amount is charged to your card. If you choose to give money to an organization with a set monetary goal and that goal is reached (i.e., the organization doesn’t need donations anymore), you’ll receive a notification via email, and you can select a new charity if you wish. What’s more, with recurring donations you set up an account where an online record is kept of all your transactions to date, so it’s simple to find appropriate documentation when you’re applying for tax deductions.
So if you have one favorite charity and you just want to keep sending your money there, recurring donations can be a quick, easy, and convenient way to keep giving.
Why and how do interest rates increase and decrease?
Thursday, November 5th, 2009Interest rates reflect the price of borrowing money. The Federal Funds Rate, the interest rate for banks borrowing money from one another, is determined by the Federal Reserve. The Fed meets eight times a year to determine if they should change the interest rate, though they can meet more frequently if there’s a crisis (such as the economic meltdown in late 2008).
The most important factor in determining the interest rate is supply and demand. If many people are buying houses and cars, the demand for funds will be high because people want to borrow money to spend, and banks want to profit from that demand. So during an economic boom, interest rates tend to be high. In an economic downturn, interest rates are very low to encourage borrowing and stimulate the economy.
The Fed’s monetary policy dictates their decision on whether to “loosen” or “tighten” the money supply. The Fed has the power to inject money into the economy – essentially printing cash, which lowers the interest rate as there is now more money available to borrow. On the other hand, the Fed can also “tighten” the money supply, by buying bonds and essentially withdrawing money from the economy, decreasing the money supply and increasing the interest rate.
Another important factor in interest rate fluctuation is whether we are in an inflationary period. If the economy is threatened by high inflation, the Fed will increase the interest rate to discourage borrowing.
The interest rate should be important to a consumer who wants to borrow money and is also a key factor in understanding how our economy functions.
How can you get on a charity board?
Monday, November 2nd, 2009To get on a charity board, you generally have to be recruited by well, that charity’s board. One of the responsibilities of board members is to find and recruit new board members – usually they look for people who bring needed skills, enthusiasm, and influence to the organization. Celebrities are sometimes asked to be board members because they bring attention to that charity, while others are asked because skills from their professional life or other experiences can benefit the charity. Some might be asked simply because they have given lots of money and have demonstrated a true interest in the cause. In essence, there are many ways to a nonprofit board, any of which require determination, interest, dedication, and a bit of money wouldn’t do any harm either.
Total Fertility Rate is…
Thursday, October 29th, 2009Total fertility rate is a measurement of how many children would be born to each woman in a society if each woman lived to the end of her childbearing years. It’s expressed as a specific number per woman in a population – total fertility rates above 2 (per woman) generally mean a population is growing. Areas with high poverty and low educational attainment tend to have high total fertility rates.