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Investing Basics - September 24th, 2004
http://www.investopedia.com
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Table of Contents:
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1. Term of the Week: Portfolio Management
2. Feature Article: Getting to Know Stock Exchanges
3. Q&A: What exactly is a portfolio?
4. Q&A: I am considering taking a loan from my qualified
retirement plan. What is the definition of a "reasonable
interest rate"?
5. Test Your Financial Knowledge
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Term of the Week: Portfolio Management
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The art and science of making decisions about investment mix and
policy, matching investments to objectives, asset allocation for
individuals and institutions, and balancing risk vs. performance.
Investopedia Says:
Portfolio management is all about strengths, weaknesses, opportunities,
and threats in the choice of debt vs. equity, domestic vs.
international, growth vs. safety, and numerous other trade-offs
encountered in the attempt to maximize return at a given appetite
for risk.
For related terms and articles, go to:
http://www.investopedia.com/terms/p/portfoliomanagement.asp
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Feature Article: Getting to Know Stock Exchanges
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A stock exchange does not own shares. Instead, it acts as a
sort of high-tech flea market where buyers connect with sellers.
Every public stock trades on one of several possible exchanges
such as the New York Stock Exchange (NYSE) or American Stock
Exchange (AMEX). Although you will most likely trade stocks
through a broker, it is important to understand the relationship
between exchanges and companies and the ways in which the
requirements of different exchanges provide protection to
investors.
Read this article at:
http://www.investopedia.com/articles/basics/04/092404.asp
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What exactly is a portfolio? Is it something I can carry around?
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The quick answer to this question is that a portfolio is a
collection of stocks, bonds, and/or other investment assets.
A portfolio may be owned by an individual, a group of people,
or a company, and it can be made up of a few different types
of investments (like those owned by individual investors) or
hundreds of different investments (like those owned by mutual
funds, pensions, and large companies). Rather than something
physical like a briefcase, which you can carry around, the
portfolio is an abstract concept and a sleek way of denoting
something that's actually not so compact.
One way to understand how investors use the term to refer to
the sum of the assets they own is to draw a comparison between
a portfolio and your office at work. You can describe your
office to others in two ways:
1. You could refer to the conventional meaning of "office,"
meaning "this is the room in which I get work done and keep
some of my work-related things." When you give this description,
the over-arching idea of the office implies all of the items
found within it.
2. You could list each individual element that composes your
office. For example, "These are the four plaster walls that
form a square around my desk. This is my computer, my filing
cabinet, my shrine to Elvis.," and so forth. When you give this
description, you build the idea of the office by presenting
its components.
When discussing a portfolio, investors use the first method
for the purpose of summation, that is, to get a quick figure
on how much all the assets they own are worth. So, as an investor,
you might say, "My portfolio [all my investments together] has
increased in value this year." This doesn't mean every one of
your investments went up in value; it means the average value
of all your investments increased. If you opted for the second
approach to describe your assets, you would have to say, "My
200 shares of GE fell 10% to $33.20, but they were offset by
the 15% increase of my 400 Microsoft shares... ." Simply put,
a portfolio is a way to think about the value of a larger group
of assets belonging to one entity.
To learn more about the basics of stocks, please see this stock
basics tutorial:
http://www.investopedia.com/university/stocks/
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I am considering taking a loan from my qualified retirement
plan (QRP). What is the definition of a "reasonable interest
rate"?
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For purposes of a qualified plan loan, the reasonable rate of
interest that the Department of Labor provides is one that is
consistent with rates charged by commercial lenders. To apply
a reasonable rate to your qualified plan loan, a plan administrator
will typically survey a few financial institutions to get a
general idea of the interest rate on a particular type of loan.
For example, assume that the purpose of your loan is to buy
a home. Your plan administrator would use a rate that is comparable
to the rates used by commercial lending institutions for mortgages.
For more information on borrowing from qualified plan loans,
please see the article "Borrowing From Your Retirement Plan:
Pros, Cons and Guidelines":
http://www.investopedia.com/articles/retirement/03/070203.asp
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Test Your Financial Knowledge
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Q. What is the largest one-day percentage loss in NYSE history?
a) 7.8%
b) 11.7%
c) 22.6%
d) 29.1%
e) 51.1%
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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