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Investing Basics - August 27th, 2004
http://www.investopedia.com
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Table of Contents:
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1. Term of the Week: Education IRA
2. Feature Article: The Purpose and Importance of Proxy Voting
3. Special Feature: Guide to Stock Picking Strategies - Part 10
4. Q&A: What is a "socially responsible" mutual fund?
5. Q&A: What are the sources of funds for companies?
6. Test Your Financial Knowledge
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Term of the Week: Education IRA
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A savings plan for higher education. Parents or guardians are
allowed to make nondeductible contributions to an education
IRA for a child under 18.
Investopedia Says:
The funds can be withdrawn tax free when they are needed for
educational purposes. The education IRA has now become the
Coverdell ESA.
For related terms and articles, go to:
http://www.investopedia.com/terms/e/educationira.asp
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Feature Article: The Purpose and Importance of Proxy Voting
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Prior to the general meeting of a company or mutual fund,
shareholders will receive a package in the mail containing a
variety of documents that report financial data and operations
results and announce important issues--such as proposals for
changes to the company's share structure or mergers and
acquisitions. These are all matters that shareholders or unit
holders, the true owners of the company or mutual fund, will
vote on at the general meeting. If, however, a shareholder is
not able to attend an annual (or special) meeting, he or she
can vote on proposals by means of a proxy, one of the documents
that is included in the pre-meeting mailing package.
Read this article at:
http://www.investopedia.com/articles/basics/04/082704.asp
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Special Feature: Guide to Stock Picking Strategies - Part 10
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Every stock investor needs a strategy for finding stocks that
fits his or her outlook and style. In this biweekly feature,
you will learn about the most popular stock-picking strategies,
including their philosophies, methods, and tools. This week
we explore technical analysis.
Read this feature at:
http://www.investopedia.com/university/stockpicking/
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What is a "socially responsible" mutual fund?
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In the financial world, where profit and return are often
the priorities of the average investor, the vehicles we use
to reach our monetary goals can be overlooked. We know that
mutual funds are able to offer instant diversification to
individual investors; they give investors access both to
different parts of a nation�s economy and to the global
marketplace. But another, perhaps buried, concern is the idea
of socially responsible investing. While investing in a big
name arms manufacturer may produce a tidy return in a person's
portfolio, it can be disturbing to learn that the weapons being
manufactured eventually become a payload in some foreign country.
By not investing in stocks in areas such as weapons, tobacco,
gambling, drugs, and alcohol products, individuals can impose
their own social and moral values on their portfolios. Furthermore,
people can choose to invest in companies they believe are making
valuable social and environmental contributions, such as
educational companies or those companies that make an effort
to curb pollution and protect the ecosystem.
Of course, people will have different ideas as to what is
socially responsible, ethical, or even moral. If an individual
chooses to invest in accordance with his or her own beliefs,
it's up to him or her to choose the investments he or she
considers appropriate. By deciding to invest in companies that
are socially responsible and accountable, investors can not
only realize financial gain, they can also feel they have
contributed to a worthy cause.
To learn more about this subject, see the article "The Return
of Sinful Investing":
http://www.investopedia.com/articles/01/040401.asp
Also check out "Socially Responsible Mutual Funds - Parts 1
and 2":
http://www.investopedia.com/articles/mutualfund/03/030503.asp
http://www.investopedia.com/articles/mutualfund/03/031903.asp
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What are the sources of funds for companies?
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Despite all the differences among companies, there are only
a few sources of funds available to all firms.
1. They make profit by selling a product for more than it
costs to produce. This is the most basic source of funds for
any company and hopefully the method that brings in the most
money.
2. Like individuals, companies can borrow money. This can be
done privately through bank loans, or it can be done publicly
through a debt issue. The drawback of borrowing money is the
interest that must be paid to the lender.
3. A company can generate money by selling part of itself in
the form of shares to investors, which is known as equity
funding. The benefit of this is that investors do not require
interest payments like bondholders do. The drawback is that
further profits are divided among all shareholders.
In an ideal world, a company would bring in all of its cash
simply by selling goods and services for a profit. But, as
the old saying goes, "you have to spend money to make money,"
and just about every company has to raise funds at some point
to develop products and expand into new markets.
When evaluating companies, it is most important to look at
the balance of the major sources of funding. For example,
too much debt can get a company into trouble. On the other
hand, a company might be missing growth prospects if it doesn't
use money that it can borrow.
For more info on evaluating companies, check out this tutorial
on fundamental analysis:
http://www.investopedia.com/university/fundamentalanalysis/
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Test Your Financial Knowledge
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Q. Which of the following is an advantage of using a bond
ladder?
a) Minimizes risk
b) Matches cash flows
c) Provides consistent returns
d) Allows you to ramp up returns
e) A, B, and C are correct
To answer this question, please visit the homepage:
http://www.investopedia.com/
Have a great week!
The Investopedia Staff
http://www.investopedia.com
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