InvestingA L L - I N - O N E

InvestingA L L - I N - O N E

by Robert S. Griswold, MBA, MSBA; Matt Krantz; Paul Mladjenovic; Eric Tyson, MBA; Russell Wild

Investing All-in-One For Dummies®

Published by: John Wiley & Sons, Inc. 111 River Street Hoboken, NJ 07030-5774 www.wiley.com

Copyright © 2017 by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Library of Congress Control Number: 2017934298

ISBN 978-1-119-37662-0 (pbk); ISBN 978-1-119-37663-7 (ebk); ISBN 978-1-119-37664-4 (ebk)

Manufactured in the United States of America

10 9 8 7 6 5 4 3 2 1

Contents at a GlanceIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Book 1: Getting Started with Investing . . . . . . . . . . . . . . . . . . . . . . . . 5CHAPTER 1: Exploring Your Investment Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7CHAPTER 2: Weighing Risks and Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17CHAPTER 3: The Workings of Stock and Bond Markets . . . . . . . . . . . . . . . . . . . . . . . . . 39

Book 2: Investing in Your 20s and 30s . . . . . . . . . . . . . . . . . . . . . . . . . 51CHAPTER 1: Using Investments to Accomplish Your Goals . . . . . . . . . . . . . . . . . . . . . . 53CHAPTER 2: Minimizing Your Taxes When Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . 63CHAPTER 3: Laying Out Your Financial Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71CHAPTER 4: Starting Out with Bank Accounts and Money Market Funds . . . . . . . . . 85

Book 3: Starting with Stock Investing . . . . . . . . . . . . . . . . . . . . . . . . . 99CHAPTER 1: Gathering Information on Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101CHAPTER 2: Investing for Long-Term Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119CHAPTER 3: Investing for Income: Dividend-Paying Stocks . . . . . . . . . . . . . . . . . . . . . 129CHAPTER 4: Using Basic Accounting to Choose Winning Stocks . . . . . . . . . . . . . . . . 143

Book 4: Looking at Bond Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . 161CHAPTER 1: Bond Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163CHAPTER 2: All about the Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179CHAPTER 3: Types of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197CHAPTER 4: Investing(Carefully!)in IndividualBonds . . . . . . . . . . . . . . . . . . . . . . . . . 213CHAPTER 5: Picking a Bond Fund That Will Serve You for Life . . . . . . . . . . . . . . . . . . 225

Book 5: Moving on to Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 233CHAPTER 1: Considering Mutual Funds’ Pros and Cons . . . . . . . . . . . . . . . . . . . . . . . 235CHAPTER 2: Finding the Best Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255CHAPTER 3: BuyingFundsfromthe BestFirms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

Book 6: Investing Online . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283CHAPTER 1: GettingReadyforOnline Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285CHAPTER 2: Getting Your Device Ready for Online Investing . . . . . . . . . . . . . . . . . . . 293CHAPTER 3: Connecting with an Online Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319CHAPTER 4: Entering and Executing Trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343

Book 7: Introducing Fundamental Analysis . . . . . . . . . . . . . . . . . 353CHAPTER 1: Understanding Fundamental Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 355CHAPTER 2: Getting Up to Speed with Fundamental Analysis . . . . . . . . . . . . . . . . . . 365CHAPTER 3: Gaining an Edge with Fundamental Analysis . . . . . . . . . . . . . . . . . . . . . . 383CHAPTER 4: Getting Your Hands on Fundamental Data . . . . . . . . . . . . . . . . . . . . . . . 401

Book 8: Investing in Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421CHAPTER 1: EvaluatingRealEstateas anInvestment . . . . . . . . . . . . . . . . . . . . . . . . . 423CHAPTER 2: Covering Common Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . 439CHAPTER 3: IdentifyingSourcesof Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457CHAPTER 4: Location, Location, Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493

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Table of ContentsINTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

About This Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Foolish Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2Icons Used in This Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Beyond the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Where to Go from Here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

BOOK 1: GETTING STARTED WITH INVESTING . . . . . . . . . . . . . . . 5

CHAPTER 1: Exploring Your Investment Choices . . . . . . . . . . . . . . . . . . . 7Getting Started with Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Building Wealth with Ownership Investments . . . . . . . . . . . . . . . . . . . . . 8

Entering the stock market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Owning real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Generating Income from Lending Investments . . . . . . . . . . . . . . . . . . .11Considering Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Where to Invest and Get Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Finding the best fund companies and brokers . . . . . . . . . . . . . . . . .14Finding an admirable advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

CHAPTER 2: Weighing Risks and Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Evaluating Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Market-value risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Individual-investment risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24Purchasing-powerrisk(akainflationrisk) . . . . . . . . . . . . . . . . . . . . .26Career risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Analyzing Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28The components of total return . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28Savings and money market account returns . . . . . . . . . . . . . . . . . . .30Bond returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31Stock returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32Real estate returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Compounding Your Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35The value of getting a few extra percent . . . . . . . . . . . . . . . . . . . . . .36Considering your goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

CHAPTER 3: The Workings of Stock and Bond Markets . . . . . . . . . . 39How Companies Raise Money through the Financial Markets . . . . . . .39

Deciding whether to issue stocks or bonds . . . . . . . . . . . . . . . . . . . .40Taking a company public: Understanding IPOs . . . . . . . . . . . . . . . .41

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Understanding Financial Markets and Economics . . . . . . . . . . . . . . . . .42Driving stock prices through earnings . . . . . . . . . . . . . . . . . . . . . . . .42Weighingwhethermarketsareefficient . . . . . . . . . . . . . . . . . . . . . .44Movingthemarket:Interestrates,inflation,and the Federal Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

BOOK 2: INVESTING IN YOUR 20S AND 30S . . . . . . . . . . . . . . . . . 51

CHAPTER 1: Using Investments to Accomplish Your Goals . . . . . . 53Setting and Prioritizing Your Shorter-Term Goals . . . . . . . . . . . . . . . . .53

Accumulating a rainy-day fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54Saving for large purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54Investing for a small business or home . . . . . . . . . . . . . . . . . . . . . . .55Saving for kids’ educational costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .56Investing short-term money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Investing in Retirement Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56Understanding retirement account perks . . . . . . . . . . . . . . . . . . . . .56Grappling with retirement account concerns . . . . . . . . . . . . . . . . . .57Taking advantage of retirement accounts . . . . . . . . . . . . . . . . . . . . .58Surveying retirement account choices . . . . . . . . . . . . . . . . . . . . . . . .59Selecting retirement account investments . . . . . . . . . . . . . . . . . . . .62

CHAPTER 2: Minimizing Your Taxes When Investing . . . . . . . . . . . . . 63Understanding Investment Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

Tracking taxation of investment distributions . . . . . . . . . . . . . . . . .64Determining your tax bracket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64Devising tax-reduction strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

Reducing Your Taxes When Selling Investments . . . . . . . . . . . . . . . . . .66Weighing nontax issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67Tuning in to tax considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

CHAPTER 3: Laying Out Your Financial Plans . . . . . . . . . . . . . . . . . . . . . . 71FirstPriorities:PayingOffHigh-CostDebtand Building a Safety Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72

Payingoffhigh-costconsumerdebt . . . . . . . . . . . . . . . . . . . . . . . . . .72Establishing an emergency reserve . . . . . . . . . . . . . . . . . . . . . . . . . .73

What about Paying Down Other Debts? . . . . . . . . . . . . . . . . . . . . . . . . .73Assessing student loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74Considering paying down mortgage debt . . . . . . . . . . . . . . . . . . . . .75

Sorting Out Your Financial Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76Considering your investment options and desires . . . . . . . . . . . . . .76Assessing your savings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77Investing regularly with dollar cost averaging . . . . . . . . . . . . . . . . . .78

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Knowing the Impact of Investing for College Costs . . . . . . . . . . . . . . . .79Paying for college . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80Considering educational savings account options . . . . . . . . . . . . . .82Investing money earmarked for college . . . . . . . . . . . . . . . . . . . . . .82

Securing Proper Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83

CHAPTER 4: Starting Out with Bank Accounts and Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Understanding FDIC Bank Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .86Investing in Banking Account and Savings Vehicles . . . . . . . . . . . . . . . .86

Bank checking accounts and debit cards . . . . . . . . . . . . . . . . . . . . . .87Savingsaccountsandcertificatesofdeposit . . . . . . . . . . . . . . . . . . .88

Feeling Secure with Your Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89Evaluating any bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90Protecting yourself when banking online . . . . . . . . . . . . . . . . . . . . .91

DefiningMoneyMarketMutualFunds . . . . . . . . . . . . . . . . . . . . . . . . . . .91Making sense of the appeal of money market funds . . . . . . . . . . . .92Understanding the drawbacks of money market funds . . . . . . . . .93

Understanding Money Market Fund Holdings . . . . . . . . . . . . . . . . . . . .93Protecting and Accessing Your Money in Money Funds . . . . . . . . . . . .94

Protecting your money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94Accessing your money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94

Using Money Market Funds in Your Investment Plan . . . . . . . . . . . . . .95Understanding Traits of Leading Money Funds . . . . . . . . . . . . . . . . . . .96

BOOK 3: STARTING WITH STOCK INVESTING . . . . . . . . . . . . . . . 99

CHAPTER 1: Gathering Information on Stocks . . . . . . . . . . . . . . . . . . . . 101Looking to Stock Exchanges for Answers . . . . . . . . . . . . . . . . . . . . . . . .102GraspingtheBasicsofAccountingand Economics . . . . . . . . . . . . . . .103

Accounting for taste and a whole lot more . . . . . . . . . . . . . . . . . . .103Understandinghoweconomicsaffectsstocks . . . . . . . . . . . . . . . .104

Staying on Top of Financial News . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108Figuring out what a company’s up to . . . . . . . . . . . . . . . . . . . . . . . .108Discovering what’s new with an industry . . . . . . . . . . . . . . . . . . . . .109Knowing what’s happening with the economy . . . . . . . . . . . . . . . .109Seeing what politicians and government bureaucrats are doing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109Checking for trends in society, culture, and entertainment . . . . .110

Reading (And Understanding) Stock Tables . . . . . . . . . . . . . . . . . . . . . .11052-week high . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11152-week low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112Name and symbol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113

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Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114P/E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114Day last . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115Net change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

Using News about Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115Looking at important dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116Understanding why certain dates matter . . . . . . . . . . . . . . . . . . . .117

Evaluating Investment Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

CHAPTER 2: Investing for Long-Term Growth . . . . . . . . . . . . . . . . . . . . . 119Becoming a Value-Oriented Growth Investor . . . . . . . . . . . . . . . . . . . .120Choosing Growth Stocks with a Few Handy Tips . . . . . . . . . . . . . . . . .121

Looking for leaders in megatrends . . . . . . . . . . . . . . . . . . . . . . . . . .122Comparing a company’s growth to an industry’s growth . . . . . . .122Considering a company with a strong niche . . . . . . . . . . . . . . . . . .123Checking out a company’s fundamentals . . . . . . . . . . . . . . . . . . . .123Evaluating a company’s management . . . . . . . . . . . . . . . . . . . . . . .124Noticing who’s buying and/or recommending a company’s stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126Making sure a company continues to do well . . . . . . . . . . . . . . . . .127Heeding investing lessons from history . . . . . . . . . . . . . . . . . . . . . .127

CHAPTER 3: Investing for Income: Dividend-Paying Stocks . . . . 129Understanding the Basics of Income Stocks . . . . . . . . . . . . . . . . . . . . .130

Getting a grip on dividends and dividend rates . . . . . . . . . . . . . . .130Recognizing who’s well-suited for income stocks . . . . . . . . . . . . . .131Assessing the advantages of income stocks . . . . . . . . . . . . . . . . . .131Heeding the disadvantages of income stocks . . . . . . . . . . . . . . . . .132

Analyzing Income Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134Pinpointingyourneedsfirst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134Checking out yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135Looking at a stock’s payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .137Studying a company’s bond rating . . . . . . . . . . . . . . . . . . . . . . . . . .137Diversifying your stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138

Exploring Some Typical Income Stocks . . . . . . . . . . . . . . . . . . . . . . . . .138It’s electric! Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139An interesting mix: Real estate investment trusts (REITs) . . . . . . .139Good energy: Royalty trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141

CHAPTER 4: Using Basic Accounting to Choose Winning Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Recognizing Value When You See It . . . . . . . . . . . . . . . . . . . . . . . . . . . .144

Understandingdifferenttypesofvalue . . . . . . . . . . . . . . . . . . . . . .144Putting the pieces together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146

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Accounting for Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147Breaking down the balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . .149Looking at the income statement . . . . . . . . . . . . . . . . . . . . . . . . . . .152Tooling around with ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156

BOOK 4: LOOKING AT BOND INVESTING . . . . . . . . . . . . . . . . . . . 161

CHAPTER 1: Bond Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163Understanding What Makes a Bond a Bond . . . . . . . . . . . . . . . . . . . . .164

Choosing your time frame . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .165Picking who you trust to hold your money . . . . . . . . . . . . . . . . . . .165Differentiatingamongbonds,stocks,andBeanieBabies . . . . . . .166

Why Hold Bonds? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167Identifyingthebestreasontobuybonds:Diversification . . . . . . .167Going for the cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .168

Introducing the Major Players in the Bond Market . . . . . . . . . . . . . . .169Buying Solo or Buying in Bulk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170

Picking and choosing individual bonds . . . . . . . . . . . . . . . . . . . . . .171Going with a bond fund or funds . . . . . . . . . . . . . . . . . . . . . . . . . . .171

The Triumphs and Failures of Fixed-Income Investing . . . . . . . . . . . .172Beatinginflation,butnotbyverymuch . . . . . . . . . . . . . . . . . . . . . .172Saving the day when the day needed saving . . . . . . . . . . . . . . . . .173Gleaning some important lessons . . . . . . . . . . . . . . . . . . . . . . . . . .174

Realizing How Crucial Bonds Are Today . . . . . . . . . . . . . . . . . . . . . . . . .176Viewing Recent Developments, Largely for the Better . . . . . . . . . . . . .177

CHAPTER 2: All about the Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179The Tricky Business That Is Calculating Rates of Return . . . . . . . . . . .180

Cutting deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .180Changing hands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181Embracing the complications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181

Measuring the Desirability of a Bond . . . . . . . . . . . . . . . . . . . . . . . . . . .182Level one: Getting the basic information . . . . . . . . . . . . . . . . . . . . .182Level two: Finding out intimate details . . . . . . . . . . . . . . . . . . . . . . .184Level three: Examining the neighborhood . . . . . . . . . . . . . . . . . . . .186

Understanding Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188Coupon yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188Current yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189Yield-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189Yield-to-call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .190Worst-case basis yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191The 30-day SEC yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191

Recognizing Total Return (This Is What Matters Most!) . . . . . . . . . . . .191Figuring in capital gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . .192Factoring in reinvestment rates of return . . . . . . . . . . . . . . . . . . . .192

xii Investing All-in-One For Dummies

Allowingforinflationadjustments . . . . . . . . . . . . . . . . . . . . . . . . . .193Pretax versus post-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193

Measuring the Volatility of Your Bond Holdings . . . . . . . . . . . . . . . . . .194Time frame matters most . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194Quality counts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195The coupon rate matters, too . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195

Returning to the Bonds of Babylonia . . . . . . . . . . . . . . . . . . . . . . . . . . .196

CHAPTER 3: Types of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197Exploring the Many Ways of Investing with Uncle Sam . . . . . . . . . . . .197

Savings bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .198Treasury bills, notes, and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .199TreasuryInflation-ProtectedSecurities(TIPS) . . . . . . . . . . . . . . . . .200

Industrial Returns: Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .201Comparing corporate bonds to Treasuries . . . . . . . . . . . . . . . . . . .202The crucial credit ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .202Special considerations for investing in corporate debt . . . . . . . . .203The volatility of high-yield bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .204

Lots of Protection, a Touch of Confusion: Agency Bonds . . . . . . . . . .205Identifying the bond issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205Sizing up the government’s actual commitment . . . . . . . . . . . . . .206Eyeing default risks, yields, markups, and more . . . . . . . . . . . . . . .207Weighing taxation matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207

Banking Your Money on Other People’s Mortgages . . . . . . . . . . . . . .208Bathing in the mortgage pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208Deciding whether to invest in the housing market . . . . . . . . . . . .208

(Almost) Tax-Free Havens: Municipal Bonds . . . . . . . . . . . . . . . . . . . . .209Sizing up the muni market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .209Comparing and contrasting with other bonds . . . . . . . . . . . . . . . .210Delightinginthediversificationofmunicipals . . . . . . . . . . . . . . . .210Choosing from a vast array of possibilities . . . . . . . . . . . . . . . . . . .211

CHAPTER 4: Investing (Carefully!) in Individual Bonds . . . . . . . . . . 213NavigatingToday’sIndividualBond Market . . . . . . . . . . . . . . . . . . . . .213

Getting some welcome transparency . . . . . . . . . . . . . . . . . . . . . . . .214Ushering in a new beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .215

Dealing with Brokers and Other Financial Professionals . . . . . . . . . .215Identifying the role of the middleman . . . . . . . . . . . . . . . . . . . . . . .216Do you need a broker or agent at all? . . . . . . . . . . . . . . . . . . . . . . .217Selecting the right broker or agent . . . . . . . . . . . . . . . . . . . . . . . . . .217Checking the dealer’s numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .218Hiringafinancialplanner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219

Doing It Yourself Online . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219If you’re looking to buy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .220If you’re looking to sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .222

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Perfecting the Art of Laddering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .222Protectingyoufrominterestrateflux . . . . . . . . . . . . . . . . . . . . . . .223Tinkering with your time frame . . . . . . . . . . . . . . . . . . . . . . . . . . . . .224

CHAPTER 5: Picking a Bond Fund That Will Serve You for Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225DefiningtheBasicKindsofFunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .226

Mining mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .227Considering an alternative: Closed-end funds . . . . . . . . . . . . . . . .227Establishing a position in exchange-traded funds . . . . . . . . . . . . .228Understanding unit investment trusts . . . . . . . . . . . . . . . . . . . . . . .229Takingaflyer(ornot)onanexchange-tradednote . . . . . . . . . . . .229

What Matters Most in Choosing a Bond Fund of Any Sort . . . . . . . . .230Selecting your fund based on its components and their characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .231Pruning out the underperformers . . . . . . . . . . . . . . . . . . . . . . . . . .231Laying down the law on loads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .232Sniffingoutfalsepromises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .232

BOOK 5: MOVING ON TO MUTUAL FUNDS . . . . . . . . . . . . . . . . . 233

CHAPTER 1: Considering Mutual Funds’ Pros and Cons . . . . . . . . . 235Introducing Mutual Funds and Exchange-Traded Funds . . . . . . . . . . .236Getting a Grip on Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .236

Financial intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .238Open-end versus closed-end funds . . . . . . . . . . . . . . . . . . . . . . . . .238

Opting for Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .240Fundmanagersofferexpertise . . . . . . . . . . . . . . . . . . . . . . . . . . . . .240Funds save you money and time . . . . . . . . . . . . . . . . . . . . . . . . . . .242Funddiversificationminimizesyourrisk . . . . . . . . . . . . . . . . . . . . .243Funds undergo regulatory scrutiny . . . . . . . . . . . . . . . . . . . . . . . . .244You choose your risk level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .245Fund risk of bankruptcy is nil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .245Funds save you from sales sharks . . . . . . . . . . . . . . . . . . . . . . . . . .246You have convenient access to your money . . . . . . . . . . . . . . . . . .246

Addressing the Drawbacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .248Don’t worry about these . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .248Worry about these (but not too much) . . . . . . . . . . . . . . . . . . . . . .249

Understanding Exchange-Traded Funds . . . . . . . . . . . . . . . . . . . . . . . .250Understanding ETF advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . .250Eyeing ETF drawbacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .251Seeing the pros and cons of trading ETFs . . . . . . . . . . . . . . . . . . . .253

xiv Investing All-in-One For Dummies

CHAPTER 2: Finding the Best Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255Evaluating Gain-Eating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .255

Losing the load: Say no to commissions . . . . . . . . . . . . . . . . . . . . .256Considering a fund’s operating expenses . . . . . . . . . . . . . . . . . . . .261

Weighing Performance and Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .263Star today, also-ran tomorrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . .264Apples to apples: Comparing performance numbers . . . . . . . . . .267

Recognizing Manager Expertise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .269

CHAPTER 3: Buying Funds from the Best Firms . . . . . . . . . . . . . . . . . . 271Finding the Best Buys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .271

The Vanguard Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .272Fidelity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .273Dodge & Cox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .275Oakmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .275T. RowePrice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .275TIAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .276USAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .276Other fund companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .276

Discount Brokers: Mutual Fund Supermarkets . . . . . . . . . . . . . . . . . . .277Buying direct versus discount brokers . . . . . . . . . . . . . . . . . . . . . . .278Debunking “No Transaction Fee” funds . . . . . . . . . . . . . . . . . . . . . .279Using the best discount brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . .281

Places to Pass By . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .281

BOOK 6: INVESTING ONLINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

CHAPTER 1: Getting Ready for Online Investing . . . . . . . . . . . . . . . . . . 285Why Investing Online Is Worth Your While . . . . . . . . . . . . . . . . . . . . . .286Getting Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .286Gut-Check Time: How Much Downside Risk Can You Tolerate? . . . . .289Passive or Active? Deciding What Kind of Investor You Plan to Be . . .290

How to know if you’re a passive investor . . . . . . . . . . . . . . . . . . . . .290Sites for passive investors to start with . . . . . . . . . . . . . . . . . . . . . .291How to know whether you’re an active investor . . . . . . . . . . . . . . .291Sites for the active investor to start with . . . . . . . . . . . . . . . . . . . . .292

CHAPTER 2: Getting Your Device Ready for Online Investing . . . 293Turning Your Device into a Trading Station . . . . . . . . . . . . . . . . . . . . . .294

Usingfavoritestoputdataatyourfingertips . . . . . . . . . . . . . . . . .294Putting key mobile apps a touch away . . . . . . . . . . . . . . . . . . . . . . .296Compiling a list of must-watch sites . . . . . . . . . . . . . . . . . . . . . . . . .296

Tracking the Market’s Every Move . . . . . . . . . . . . . . . . . . . . . . . . . . . . .297Getting price quotes on markets and stocks . . . . . . . . . . . . . . . . . .297Slicing and dicing the markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .298

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Your crystal ball: Predicting how the day will begin . . . . . . . . . . . .300Getting company descriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .300TrackingbondsandU.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . .301

Monitoring Market-Moving News . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .302Financial websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .302Traditionalfinancialnewssites . . . . . . . . . . . . . . . . . . . . . . . . . . . . .304

Checking In on Wall Street Chatter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .306Checking in with blogs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .307Getting in tune with podcasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .307Taming Twitter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .309Getting your computer to do the work: RSS feeds . . . . . . . . . . . . .309

Keeping Tabs on the Regulators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .310Executing Trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .312Searching the Internet High and Low . . . . . . . . . . . . . . . . . . . . . . . . . . .313Keeping the Bad Guys Out: Securing Your PC . . . . . . . . . . . . . . . . . . . .313Mastering the Basics with Online Tutorials and Simulations . . . . . . .315

Online tutorials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .315Simulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .317

CHAPTER 3: Connecting with an Online Broker . . . . . . . . . . . . . . . . . . 319Finding the Best Broker for You . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .320

Main factors to consider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .320“Gotchas” to watch out for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .322

Separating the Types of Brokerages . . . . . . . . . . . . . . . . . . . . . . . . . . . .322Deep discounters: Trading for $5 or less . . . . . . . . . . . . . . . . . . . . .323Discounters: Trading for $5 .01 to $10 . . . . . . . . . . . . . . . . . . . . . . .325Full-service traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .331

Avoiding Hidden Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .332Finding Out What Reviewers Think . . . . . . . . . . . . . . . . . . . . . . . . . . . . .334Is Your Money Safe? Checking Out Your Broker . . . . . . . . . . . . . . . . . .335Cutting the Cord: Mobile Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .336Pay Attention to Where Your Cash Is Parked: Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .338Buying Stocks and Mutual Funds without a Broker . . . . . . . . . . . . . . .338

Stocks: Direct investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .339Mutual funds: Straight from the mutual fund company . . . . . . . .340

Opening and Setting Up Your Account . . . . . . . . . . . . . . . . . . . . . . . . . .341The checklist of what you need to know . . . . . . . . . . . . . . . . . . . . .341The checklist of what you need to have . . . . . . . . . . . . . . . . . . . . . .342

CHAPTER 4: Entering and Executing Trades . . . . . . . . . . . . . . . . . . . . . . . 343Understanding How Stock Trades and Shares Are Handled . . . . . . . .344

Ways you can hold your investments . . . . . . . . . . . . . . . . . . . . . . . .344A second in the life of a trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .348

xvi Investing All-in-One For Dummies

Getting It Done: Executing Your Trades . . . . . . . . . . . . . . . . . . . . . . . . .348Types of orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .349Costsofdifferentorders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .350Tailoring your trades even more . . . . . . . . . . . . . . . . . . . . . . . . . . . .351

BOOK 7: INTRODUCING FUNDAMENTAL ANALYSIS . . . . . 353

CHAPTER 1: Understanding Fundamental Analysis . . . . . . . . . . . . . 355Why Bother with Fundamental Analysis? . . . . . . . . . . . . . . . . . . . . . . . .356

Some of the real values of fundamental analysis . . . . . . . . . . . . . .356Driving home an example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .357Putting fundamental analysis to work . . . . . . . . . . . . . . . . . . . . . . .359Knowing what fundamentals to look for . . . . . . . . . . . . . . . . . . . . .360Knowing what you need . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .361

Knowing the Tools of the Fundamental Analysis Trade . . . . . . . . . . . .361Staying focused on the bottom line . . . . . . . . . . . . . . . . . . . . . . . . .362Sizing up what a company has to its name . . . . . . . . . . . . . . . . . . .362Eyeingacompany’scashflow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .362Financial ratios: Your friend in making sense of a company . . . . .363

Making Fundamental Analysis Work for You . . . . . . . . . . . . . . . . . . . . .363Using fundamentals as signals to buy or sell . . . . . . . . . . . . . . . . .363The perils of ignoring the fundamentals . . . . . . . . . . . . . . . . . . . . .364Using fundamental analysis as your guide . . . . . . . . . . . . . . . . . . .364

CHAPTER 2: Getting Up to Speed with Fundamental Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365What Is Fundamental Analysis? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .366

Going beyond betting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .366Understanding how fundamental analysis works . . . . . . . . . . . . .368Who can perform fundamental analysis? . . . . . . . . . . . . . . . . . . . .369Following the money using fundamentals . . . . . . . . . . . . . . . . . . . .371

Comparing Fundamental Analysis with Other Ways of Picking Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .372

How fundamental analysis stacks up against index investing . . .372Comparing fundamental analysis with technical analysis . . . . . . .373

Putting Fundamental Analysis to Work for You . . . . . . . . . . . . . . . . . .374Howdifficultisfundamentalanalysis?DoIneed to be a math wizard? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .375Is fundamental analysis for you? . . . . . . . . . . . . . . . . . . . . . . . . . . . .375The risks of fundamental analysis . . . . . . . . . . . . . . . . . . . . . . . . . .376

Making Money with Fundamental Analysis . . . . . . . . . . . . . . . . . . . . . .377Putting a price tag on a stock or bond . . . . . . . . . . . . . . . . . . . . . . .377Beingprofitablebybeinga“contrarian” . . . . . . . . . . . . . . . . . . . . .378

Table of Contents xvii

The Fundamental Analysis Toolbox . . . . . . . . . . . . . . . . . . . . . . . . . . . .378Introducing the income statement . . . . . . . . . . . . . . . . . . . . . . . . . .379Balance-sheet basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .379Gettingthemojoofcashflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . .380Familiarizingyourselfwithfinancialratios(includingtheP/E) . . .380

CHAPTER 3: Gaining an Edge with Fundamental Analysis . . . . . . 383Better Investing with Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . .384

Picking stocks for fundamental reasons . . . . . . . . . . . . . . . . . . . . .385Dooming your portfolio by paying too much . . . . . . . . . . . . . . . . .388Sitting through short-term volatility . . . . . . . . . . . . . . . . . . . . . . . . .389

Relying on the Basic Info the Pros Use . . . . . . . . . . . . . . . . . . . . . . . . . .390Whatis“theWarrenBuffettWay”? . . . . . . . . . . . . . . . . . . . . . . . . . .391Checking in on Graham and Dodd . . . . . . . . . . . . . . . . . . . . . . . . . .393

Figuring Out When to Buy or Sell a Stock . . . . . . . . . . . . . . . . . . . . . . .394Looking beyond the per-share price to market value . . . . . . . . . .395Seeing how a company’s fundamentals and its price may get out of alignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .396Avoiding overhyped story stocks . . . . . . . . . . . . . . . . . . . . . . . . . . .397Pairing buy-and-hold strategies with fundamental analysis . . . . .398Looking to the long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .399Patience isn’t always a virtue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .400

CHAPTER 4: Getting Your Hands on Fundamental Data . . . . . . . . 401Getting In Sync with the Fundamental Calendar . . . . . . . . . . . . . . . . .402

Whichcompaniesmustreporttheirfinancials to the public? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .402Kickingitalloff:Earningsseason . . . . . . . . . . . . . . . . . . . . . . . . . . .403Getting the earnings press release . . . . . . . . . . . . . . . . . . . . . . . . . .404Bracing for the 10-Q . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .405Running through the 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407Flipping through the annual report . . . . . . . . . . . . . . . . . . . . . . . . .408There’s no proxy like the proxy statement . . . . . . . . . . . . . . . . . . .409

Getting up to Speed with the Basic Accounting and Math . . . . . . . . .410Operating activities: Finding smooth operators . . . . . . . . . . . . . . .411Investing activities: You have to spend money to make money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .411Financingactivities:Gettingintunewithhighfinance . . . . . . . . . .411Learning a key fundamental math skill: Percentage changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .413

How to Get the Fundamental Data You Need . . . . . . . . . . . . . . . . . . . .414Getting acquainted with the SEC’s database . . . . . . . . . . . . . . . . . .414Step-by-step directions on accessing company fundamentals using EDGAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .414

xviii Investing All-in-One For Dummies

Pulling fundamental data from websites into spreadsheets . . . .416Finding stocks’ dividend histories . . . . . . . . . . . . . . . . . . . . . . . . . . .417Getting stock-split information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .418

BOOK 8: INVESTING IN REAL ESTATE . . . . . . . . . . . . . . . . . . . . . . . . 421

CHAPTER 1: Evaluating Real Estate as an Investment . . . . . . . . . . . 423UnderstandingRealEstate’sIncome-and  Wealth-Producing Potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .424Recognizing the Caveats of Real Estate Investing . . . . . . . . . . . . . . . . .426Comparing Real Estate to Other Investments . . . . . . . . . . . . . . . . . . . .427

Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .427Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .429Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .429Capital requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .430Diversificationvalue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .430Opportunities to add value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .430Being aware of the tax advantages . . . . . . . . . . . . . . . . . . . . . . . . . .431

Determining Whether You Should Invest in Real Estate . . . . . . . . . . .432Doyouhavesufficienttime? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .432Can you deal with problems? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .433Does real estate interest you? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .433Can you handle market downturns? . . . . . . . . . . . . . . . . . . . . . . . .433

Fitting Real Estate into Your Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .434Ensureyourbestpersonalfinancialhealth . . . . . . . . . . . . . . . . . . .434Protect yourself with insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .434Consider retirement account funding . . . . . . . . . . . . . . . . . . . . . . .435Think about asset allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .436

CHAPTER 2: Covering Common Real Estate Investments . . . . . . . 439Identifying the Various Ways to Invest in Residential Income Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .439

Buying a place of your own . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .440Converting your home to a rental . . . . . . . . . . . . . . . . . . . . . . . . . . .441Investingandlivinginwell-situatedfixer-uppers . . . . . . . . . . . . . .442Purchasing a vacation home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .443Paying for condo hotels and timeshares . . . . . . . . . . . . . . . . . . . . .445

Surveying the Types of Residential Properties You Can Buy . . . . . . .447Single-family homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .447Attached housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .448Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .450

Considering Commercial Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . .452Buying Undeveloped Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .453

Table of Contents xix

CHAPTER 3: Identifying Sources of Capital . . . . . . . . . . . . . . . . . . . . . . . . 457Calculating the Costs of Admission . . . . . . . . . . . . . . . . . . . . . . . . . . . . .458

Forgetting the myth of no money down . . . . . . . . . . . . . . . . . . . . .458Determining what you need to get started . . . . . . . . . . . . . . . . . . .459

Rounding Up the Required Cash by Saving . . . . . . . . . . . . . . . . . . . . . .460Overcoming Down Payment Limitations . . . . . . . . . . . . . . . . . . . . . . . .460

Changing your approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .461Tapping into other common cash sources . . . . . . . . . . . . . . . . . . .461

CHAPTER 4: Location, Location, Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465Deciding Where to Invest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .466Finding Properties to Add Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .467Evaluating a Region: The Big Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . .469

Population growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .470Job growth and income levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .471

Investigating Your Local Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .472Supply and demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .473Focusing on the path of progress . . . . . . . . . . . . . . . . . . . . . . . . . . .478Considering barriers to entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .479Government’seffectonrealestate . . . . . . . . . . . . . . . . . . . . . . . . . .484

Evaluating Neighborhoods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .485Schools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .485Crime rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .486Pride of ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .486Role play: What attracts you to the property? . . . . . . . . . . . . . . . . .487

Mastering Seller’s and Buyer’s Markets . . . . . . . . . . . . . . . . . . . . . . . . .490Understanding real estate cycles . . . . . . . . . . . . . . . . . . . . . . . . . . .490Timing the real estate market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .491

INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493

Introduction 1

Introduction

Successful investing takes diligent work and knowledge, like any other meaningful pursuit. Investing All-in-One For Dummies presents basic invest-ing topics — such as building an emergency fund, determining your finan-

cial goals, and choosing a broker (if you’re not a do-it-yourself investor) — but also introduces some slightly more advanced subjects, like fundamental analysis, that can enhance your investing strategies. In between, we explain the basics of investing in stocks, bonds, mutual funds, and real estate.

This book can help you avoid the mistakes others have made and can point you in the right direction as you build you portfolio. Explore the pages of this book and find the topics that most interest you within the world of investing.

In all the years that we’ve counseled and educated investors, the single differ-ence between success and failure, between gain and loss, has boiled down to two words: applied knowledge. Take this book as your first step in a lifelong learning adventure.

About This BookTo build wealth, you don’t need a fancy college or graduate-school degree, and you don’t need a rich parent, biological or adopted! What you do need is a desire to read and practice the many simple yet powerful lessons and strategies in this book.

This book is designed to give you a realistic approach to making money. It pro-vides sound, practical investing strategies and insights that have been market-tested and proven from more than 100 years of stock market history. We don’t expect you to read it cover to cover. Instead, this book is designed as a reference tool. Feel free to read the chapters in whatever order you choose. You can flip to the sections and chapters that interest you or those that include topics that you need to know more about.

Investing intelligently isn’t rocket science. By all means, if you’re dealing with a complicated, atypical issue, get quality professional help. But educate yourself first. Hiring someone is dangerous if you’re financially challenged. If you do decide to hire someone, you’ll be much better prepared if you educate yourself. Doing so can also help you focus your questions and assess that person’s competence.

Foolish AssumptionsNo matter your skill or experience level with investing, you can get something out of Investing All-in-One For Dummies. We assume that some readers haven’t invested in anything other than baseball cards or Pez dispensers and have no clue of where to even start. If that describes you, the first part of the book is custom-made for you and takes extra care to step through all the key points in as much plain English as possible. (When we have no choice but to use investing jargon, we tell you what it means.) But we also assume that more advanced investors may pick this book up, too, looking to discover a few things. The book takes on more advanced topics as you progress through it.

Here are some assumptions we made about you as we crafted this book:

» You have about seven cents in your checking account and you’re working to pay off credit card debt or student loans (or both), but you know you need to start saving for the future.

» You’re debt-free, and you’d like to start a portfolio.

» You may have some investments, but you’re looking to develop a full-scale investment plan.

» You’re tired of feeling overwhelmed by your investing choices and stressed out by the ever-changing economic and investing landscape, and you want to get more comfortable with your investment selections.

» You want to evaluate your investment advisor’s advice.

» You have a company-sponsored investment plan, like a 401(k), and you’re looking to make some decisions or roll it over into a new plan.

If one or more of these descriptions sound familiar, you’ve come to the right place.

2 Investing All-in-One For Dummies

Icons Used in This BookThroughout this book, icons help guide you through the maze of suggestions, solutions, and cautions. We hope the following images make your journey through investment strategies smoother.

We use this icon to highlight an issue that requires more detective work on your part. Don’t worry, though; we prepare you for your work so you don’t have to start out as a novice gumshoe.

We think the name says it all, but this icon indicates something really, really important — don’t you forget it!

Skip it or read it; the choice is yours. You’ll fill your head with more stuff that may prove valuable as you expand your investing know-how, but you risk overdosing on stuff that you may not need right away.

This icon denotes strategies that can enable you to build wealth faster and leap over tall obstacles in a single bound. (Okay, maybe just the first one.)

This icon indicates treacherous territory that has made mincemeat out of lesser mortals who have come before you. Skip this point at your own peril.

Beyond the BookIn addition to the material in the print or e-book you’re reading right now, this  product comes with a free access-anywhere Cheat Sheet that can set you on the path to successful investing. To get this Cheat Sheet, simply go to www. dummies.com and search for “Investing All-in-One For Dummies Cheat Sheet” in the Search box.

Introduction 3

Where to Go from HereIf you’re a new investor, you may want to consider starting from the beginning. That way, you’ll be ready for some of the more advanced topics we introduce later in the book. But you don’t have to read this book cover to cover. If you have a specific question or two that you want to focus on today, or if you want to find some additional information tomorrow, that’s not a problem. Investing All-in-One For Dummies makes it easy to find answers to specific questions. Just turn to the table of contents or index to locate the information you need. You can get in and get out, just like that.

4 Investing All-in-One For Dummies

1Getting Started with Investing

Contents at a GlanceCHAPTER 1: Exploring Your Investment Choices . . . . . . . . . . . . . . . . 7

Getting Started with Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Building Wealth with Ownership Investments . . . . . . . . . . . . . . . . . . 8Generating Income from Lending Investments . . . . . . . . . . . . . . . . 11Considering Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Where to Invest and Get Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

CHAPTER 2: Weighing Risks and Returns . . . . . . . . . . . . . . . . . . . . . . . 17Evaluating Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Analyzing Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Compounding Your Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

CHAPTER 3: The Workings of Stock and Bond Markets . . . . . . . 39How Companies Raise Money through the Financial Markets . . . . 39Understanding Financial Markets and Economics . . . . . . . . . . . . . . 42

CHAPTER 1 Exploring Your Investment Choices 7

Exploring Your Investment Choices

In many parts of the world, life’s basic necessities  — food, clothing, shelter, and taxes — consume the entirety of people’s meager earnings. Although some Americans do truly struggle for basic necessities, the bigger problem for other

Americans is that they consider just about everything — eating out, driving new cars, hopping on airplanes for vacation — to be a necessity. In reality, investing — that is, putting your money to work for you — is a necessity. If you want to accom-plish important personal and financial goals, such as owning a home, starting your own business, helping your kids through college (and spending more time with them when they’re young), retiring comfortably, and so on, you must know how to invest well.

It’s been said, and too often quoted, that the only certainties in life are death and taxes. To these two certainties we add one more: being confused by and ignorant about investing. Because investing is a confounding activity, you may be tempted to look with envious eyes at those people who appear to be savvy with money and investing. Remember that everyone starts with the same level of financial knowl-edge: none! No one was born knowing this stuff. The only difference between those who know and those who don’t is that those who know have devoted their time and energy to acquiring useful knowledge about the investment world.

Chapter 1

IN THIS CHAPTER

» Defining investing

» Seeing how stocks and real estate build long-term wealth

» Understanding the role of lending and other investments

» Selecting investment firms and brokers

8 BOOK 1 Getting Started with Investing

Getting Started with InvestingBefore we discuss the major investing alternatives in the rest of this chapter, we want to start with something that’s quite basic yet important. What exactly do we mean when we say “investing”? Simply stated, investing means you have money put away for future use.

You can choose from tens of thousands of stocks, bonds, mutual funds, exchange-traded funds, and other investments. Unfortunately for the novice, and even for the experts who are honest with you, knowing the name of the investment is just the tip of the iceberg. Underneath each of these investments lurks a veritable mountain of details.

If you wanted to and had the ability to quit your day job, you could make a full-time endeavor out of analyzing economic trends and financial statements and talking to business employees, customers, suppliers, and so on. However, we don’t want to scare you away from investing just because some people do it on a full-time basis. Making wise investments need not take a lot of your time. If you know where to get high-quality information and you purchase well-managed investments, you can leave the investment management to the best experts. Then you can do the work that you’re best at and have more free time for the things you really enjoy doing.

An important part of making wise investments is knowing when you have enough information to do things well on your own versus when you should hire others. For example, investing in foreign stock markets is generally more difficult to research and understand compared with investing in domestic markets. Thus, when investing overseas, hiring a good money manager, such as through a mutual or exchange-traded fund, makes more sense than going to all the time, trouble, and expense of picking your own individual stocks.

We’re here to give you the information you need to make your way through the com-plex investment world. In the rest of this chapter, we clear a path so you can identify the major investments and understand the strengths and weaknesses of each.

Building Wealth with Ownership Investments

If you want your money to grow faster than the rate of inflation over the long term and you don’t mind a bit of a roller-coaster ride from time to time in your investments’ values, ownership investments are for you. Ownership investments are those investments where you own an interest in some company or other asset