Exchanges exist for all types of securities. For example, FOREX is the foreign currency exchange where people can trade currency. You can also trade stocks, bonds, and other securities on an exchange.

Stock Exchange

A stock exchange is where stocks, bonds, derivatives, and other securities are traded between stock brokers. There are many exchanges around the world that are used to bring buyers and sellers together.

The purpose of a stock exchange is to give investors a place to exchange stocks. Corporations choose to sell shares of stock in an exchange to raise capital for the company.

Stock Market

The stock market isn’t a physical location. It’s the way buyers and sellers exchange stocks and other investments. The market is how the prices of the stock are determined using supply and demand.

The exchange is where this takes place. For example, the New York Stock Exchange has thousands of companies trading. There is also the NASDAQ and many other exchanges worldwide.

Primary and Secondary Markets

When a company first decides to issue stock, it is sold in the primary market. After that, whenever these shares are bought and sold, they are traded in the secondary market. This all takes place within the stock exchange where the stocks are sold.

OTC – Over the Counter

Any company that is not listed on the stock exchange but that sells stock is considered an OTC stock or over the counter stock. You can still purchase them, just not through a stock exchange. Penny stocks and other high risk stocks are often sold over the counter.

The stock exchange is only one small component of investing. Learn more about stock investing here.

Initial Pricing

First, when a company decides to go public, it must decide how much to price the stock. Basically, it is giving everyone a chance to invest in the company. People won’t invest if they don’t think it’s a worthwhile purchase. They want to know they are paying what the company is worth and no more.

How a company chooses to price their stock initially can be based on many factors. The company works with investment firms to come up with the right price. The goal is that the price will go up over time.

Supply and Demand

Prices of all products vary based on supply and demand. When demand increases, the price goes up. When supply increases, the price goes down. Supply and demand pull on the price of stock in every which direction.

For example, if lots of people decide to purchase shares of Apple and there aren’t enough people to sell, the price will go up to encourage more people to sell and/or discourage some people from buying. It’s a balance.

Other Factors

While supply and demand move the price, what factors increase supply and demand? Why do investors choose to buy or sell? There are many factors that will affect this.

For example, there are long-term investors who choose to buy stocks that they believe are currently undervalued. There are stock traders who are constantly buying and selling stocks quickly. There are new investors that haven’t properly prepared themselves and don’t know what they are doing. There are investors who invest solely on the recommendations of friends and television shows.

Ultimately, as an investor, your goal is to look for corporations that sell stocks that you hope will increase in value in the future. You have to do the research. Which stocks are undervalued? How can you diversify effectively among those stocks?

A basic understanding of the economic principle of supply and demand will get you started in the right direction. Take that information and learn from it to build an impressive portfolio.

Stocks aren’t sold at a store, and you can’t buy stock certificates anymore, unless you purchase them through a program that sells one share for gifting purposes. As an investor, that’s not what you’re looking for. You need a brokerage account.

What is a Broker?

A broker is the person that buys stock. They need to be licensed in order to buy stock an exchange.

A stock brokerage firm is a company that employs stock brokers who make the physical purchases at the stock exchange. They do all the hard work for you. They find someone who wants to buy or sell shares of what you’re selling or trying to buy. They try to get you the best price.

Years ago, you had to call up your broker every time you wanted to make a trade. Today, with the internet, you can set up an account quickly and easily online and place your orders electronically. It’s a lot faster, easier, and more convenient.

Full Service or Discount Broker?

A full service broker is one that offers many services such as stock advice and other help. They cost a lot more than discount brokers. If you want nothing to do with your investments other than handing over your money, and you don’t care how much it costs, a full service broker can work out for you. Even if you want to know what’s going on with your money, they can help.

If you want to save money and you’re able and willing to make your own stock purchase decisions, a discount broker is the way to go. They are convenient and offer no bells and whistles. You decide what you want, place the order, and manage your portfolio online. The fees are usually a tiny percentage of what full service brokers charge.

Are you looking for a good broker? Click here for some of the top discount brokers to choose from. Pick the one that fits your needs, set up an account, and start investing.

Making the actual stock purchases is actually the easy part. It’s finding the right ones to buy that takes more time and effort. Don’t worry about it. You’ll get a hang of it soon enough.

What is a Stock Loss?

When you sell shares of stock, you have either a loss, gain, or break even. If you sell shares for more than you paid, it’s a  gain. If you sell shares for less than you paid, it’s a loss.

If you have a stock gain, you must report it as income. A stock loss is only realized when you sell your shares. Even if the value has gone down but you haven’t sold your shares, it’s not a loss. The same goes for gains. You don’t report price increases as income unless they are gains from selling shares.

Can You Deduct Stock Losses?

First, you need to determine if you have a net loss. For example, let’s say you sell 100 shares of stock A with a loss of $5 per share for a total of $500. This is a loss, however, if you also sold 50 shares of Stock B with a gain of $15 per share for a total of $750, the initial loss if offset. Now you will report a gain of $250. The loss is still factored into your tax burden, it just needs to go against any other gains first.

After offsetting any capital gains, if there are any more losses, you can use these losses reduce ordinary income up to $3,000.  For example, let’s say you have a total stock loss of $2,000 for the year and you’re taxable income is $6,000. You can deduct that $2,000 from your $6,000 taxable income.

This is a benefit for many taxpayers because the tax rate paid on gains is usually less than the tax rate paid on ordinary income. However, with losses, the savings comes with ordinary income. Let’s use the above example. If you’re in the 27% tax bracket, you’re saving 27% of that $2,000, whereas if it was a long-term gain, you’d pay 15%.

It’s good on both ends. You only have to pay a maximum of 15% on long-term capital gains, but you get a bigger tax break if you have losses. This benefit can help ease the burden and frustration that comes with stock losses.

What if Your Losses are More than $3,000?

Don’t worry about your losses exceeding the $3,000. They won’t go to waste. If losses exceed this certain amount, they can be carried over year to year. This way, they aren’t wasted. For example, if you’re are unfortunate enough to incur $9,000 in stock losses, you can carry the balance over each year until it’s used up.

Reporting Capital Gains vs Losses

The rate at which capital gains are reported varies based on whether they are long-term or short-term gains. This doesn’t matter with losses. Losses are deducted from gains and ordinary income respectively, regardless of the tax rate. As we mentioned above, losses have a greater tax savings advantage while long-term gains have a lower tax rate than regular income.

As a stock investor, your gains and losses have tax advantages. This is a great way to encourage yourself to invest more and earn more money with the stock market.

There are two parts to budgeting. First, you need to set up your budget. The budget you set up may need to be adjusted from time to time. The second part is to follow that budget.

Most people will find following the budget more difficult than making it, even though setting it up takes more time. This is because a budget often means spending less on things you want and having to keep track of your spending. For those who have been way overspending for years, this can be tough at first. Push through the hard days or weeks and it will become easier, especially when you start to see all the money you’re saving.

As far as the tracking goes, this shouldn’t be hard. Set up an account at Mint.com. It’s free to set up an account, and it makes tracking your spending a lot easier. Connect your bank and credit card accounts and it will track your spending for you. You can even check it from your smart phone to make sure you’re always on track.

Learn More About the Details of Budgeting

What is Budgeting?

How to Budget

Limits don’t sound fun. The limits aren’t so great, but when it means you can save a lot of money, a simple limit doesn’t seem so bad. Just think of it this way, by cutting back your spending on entertainment, eating out, and new clothes, you could do something bigger and better later like buy a new house or take a dream vacation.

When I say limits, I mean limits, not total restricted spending. Yes, those in deep financial debt will need to cut out all unnecessary spending 100% if they want to get rid of the debt as fast as possible. If you have a moderate amount of debt or no debt and you just want to save money, limited spending will help.

Saving First

Budgeting is all about saving first and making priorities. Instead of spending your money freely, you have a plan. How much goes to the mortgage or rent? How much can you spend on food? How much do you need for utilities? Keeping track will help you monitor your spending and keep it under control.

Before you start setting your limits, set your savings first. Start by saving 5% of your income and increase it whenever possible. By putting your savings aside first, you will make sure it gets done.

Controlling Your Spending

What do You Like Best?

You don’t have to cut back a lot on the things you enjoy. In fact, sometimes it’s just a matter of controlling your spending instead of restricting it. For example, maybe you love going to the movies and go once a week paying about $10 a week for a movie ticket. Sometimes you go a little overboard and go twice a week.

If you normally go once a week it should cost about $40 a month. If two of those weeks you go twice, it will cost you $60. With a budget, you can allow yourself that once per week budget. Just stay within that budget and you won’t waste $20 or more. You still get to see nearly as many movies and save a lot.

Think about what you enjoy most and allocate more money on those. If you love going to the movies, give yourself a monthly quota. If you enjoy eating out, give yourself a certain amount of spending money for that.

Save on Things You Care Less About

There will always be things you don’t care about or you don’t like as much. Cut back on these things more so that you can save money and spend more on things you like. For example, if you don’t care so much about what brands of clothes you get, look for sales and shop bargains. If you don’t watch much tv, get rid of cable and get Netflix, or scratch it altogether. Cut back or eliminate spending you don’t want or care about.

Save on Everything

Whether you’re talking about needs, wants, or something in between, always look for a way to save. Stretch your spending and you might eventually find yourself saving even more than your budget requires.

Setting financial goals will allow you to have something to work toward. It will also allow you to complete things you only dreamed about or put yourself in a position financially that you never thought you could achieve. Even if you aren’t ‘reaching for the stars’, goals will help you use your money wisely and make it worthwhile.

Setting Financial Goals

In order to set your financial goals, you need to know what you want. Do you have debt to pay off? Do you want to buy a house? Do you wish you could take a few months or years off and travel the world? These are all great financial goals you can set for yourself.

Long Term Financial Goals

Long term financial goals are those that will likely take at least a few years. Some may take decades. It’s important to include long term goals. Often these are goals that you may otherwise have ignored if you thought you didn’t make enough money. Here are some common long term goals:

• Pay off debt
• Buy a house
• Buy a car
• Send your kids to college
• Send yourself to college
• Take a vacation
• Take time off for a mini retirement/long vacation
• Buy a second home

Short Term Financial Goals

Short term goals are just as important. Instead of financing that new television you want and paying a bunch of extra money in interest, make it a short term savings goal.

Put aside money from each paycheck and pay cash when you have enough. You’ll enjoy it more because you waited and saved, and you won’t have to pay a bunch of money in interest. Here are some common short term goals:

• New Television
• Pay off moderate debt
• Home upgrades like new counter tops or new carpeting
• Weekend vacation

Completing Your Goals

Completing your goals takes a plan. Determine how much money you need to set aside each month in order to complete it by your target date. For example,  let’s say you want to buy a new television that will cost $1,000. You want to buy the television in 10 months. You must save $100 a month to reach that goal.

Of course, the long-term goals will take longer and be more involved, but this is basically how it works. You should also work in any potential interest or investment return. That will help you achieve your goals faster.

• Step 1: Calculate Your Total Monthly Income

First, add up all your income for the month. For most individuals, this number stays the same each month. Others may have less stable income, such as business owners. Income sources can include:

• Regular full-time job/salary
• Part-time
• Side business
• Interest from savings accounts, CDs, bonds, etc.
• Investment income
• Dividends
• Rental income (if you own rental properties)

If your income is irregular, you’ll need to do more adjusting. Try to come up with the best average figure you can.

• Step 2: Calculate Your Total Monthly Expenses

Add up all your expenses for the month just as you did with your income. This is going to be a little more tedious. A great way to do this is to track your spending for a month. Track everything exactly. Include things as big as your mortgage and as small as the occasional cup of coffee or movie ticket.

If you use a credit card or debit card most of the time, you can fairly easily go back and see where your money was spent. Just make sure you include any cash purchases that may have slipped through.

• Step 3: Subtract Your Expense Total from your Income Total

Which number is higher? If they are roughly the same, you’re breaking even. If your income is greater, you’re saving money, and if your expenses are greater, you’re going into debt. The ideal situation is that your income is greater by as much as possible.

• Step 4: Determine Your Savings Goals

Look at your financial goals and determine how much money you need to set aside each month to reach these savings goals. For example, if you want to save $200 a month for retirement, you must take $200 out of your income before anything else. Another example is your debt. How much do you need to pay toward your debt each month to have it paid off by your desired date? This needs to be set aside first and foremost.

Add up all these savings goals. They will either be too aggressive, reasonable, or not aggressive enough. You’ll have a better idea of this once you start allocating your budget. For now, leave the number as it is.

• Step 5: Allocate Your Budget with Spending Limits

First, subtract the amount of your monthly savings goals from your monthly income. The money leftover is what you can allocate to the rest of your expenses.

Start with your fixed expenses such as:

1. Rent or Mortgage
2. Insurance
3. Phone/cable/internet
4. Car payments

These stay the same. Some will be necessary, such as rent or mortgage, and others are optional like cable and cell phone payments. Don’t worry about dropping or reducing these payments yet. Set these limits and subtract.

Take the rest of the money you have left and divide it up among the rest of your variable expenses such as:

1. Gas
2. Food and other groceries
3. Utilities
4. Entertainment
5. Clothes
6. Eating out

These are expenses that don’t stay the same each month. Start allocating the money toward necessary expenses leaving the extras for last.

• Step 6: Making Adjustments

Did you run out of money before finishing your expenses? Chances are you did if you broke even or were spending more than your income before. Start by adjusting unnecessary expenses like entertainment, cable, or eating out. Bring these down as low as you can. If you don’t want to eliminate entertainment expenses, find ways to reduce other costs. Look for money saving techniques to help you save where you want without sacrificing everything you enjoy.

It may take some time to adjust your budget accordingly. If you’ve cut out just about everything fun and cut back as much as possible on necessary expenses and still don’t have enough, you may need to go back to your savings goals. Were they too aggressive? Start by saving 10% of your income and work your way from there. You might need to reduce your savings goals from the start and work your way up.

If you’re set on saving this much money each month, you’re only other alternative is to make more money. While many people won’t want to go out and get another job just to save more money, it is a viable option.

• Step 7: Putting the Plan into Action

By now you should have a list of spending limits. For example, you will have a set amount for your rent or mortgage, $300 a month for gas, $500 a month for food, etc. Use a program like Mint.com. You can connect your financial accounts and set your spending limits within the program so that you can easily see if you’re spending correctly throughout the month. You’ll always know exactly how much money you have left in each category.

If this isn’t your thing, set up a spreadsheet, use a notebook, or use the envelope system. Do whatever you need to do in order to follow your budget each and every month.

Putting your budget into action is easily the most important step. If you aren’t following the budget, you won’t see the results. All the time you spent setting it up will be a waste. Don’t let it be a matter of forcing yourself to make too many sacrifices. You can always adjust things as necessary, but only if absolutely necessary. If you can’t stick to a reasonable budget, you need to figure out why.

Variation in Investments

There are so many different types of stocks and bonds that it would be impossible to say that one security in general is riskier than the other. Basic investment principles may tell you to buy stocks in this economy and bonds in the opposite economy. Looking at the merits of the individual investment will help you to better determine which carries less risk.

Stocks

If you want to invest in stocks that are less risky, look for blue chip companies. These are companies that have been around for a long time with a good reputation. You are probably very familiar with many of the available blue chip companies like the following:

• Disney
• Proctor & Gamble
• ExxonMobile
• McDonald’s
• Coca-Cola
• Intel

These companies have been around for a long time and are more stable than newer companies. However, they will also probably not earn as much as newer, up-and-coming companies. If you’re okay with a lower return, blue chip companies can be a great addition to a low risk portfolio.

Small cap companies and newer growth companies are riskier. They could do extremely well and earn you a lot of money, but they could also go down in value or tank completely. Penny stocks are even worse. These are the riskiest of the stocks. They are stocks that sell for less than $5 per share and are often companies that are brand new or near bankruptcy.

Bonds

Government bonds are very low-risk, but they also offer very low interest rates. Corporate bonds can vary from each end of the spectrum. High yield or junk bonds are the riskiest and can easily be riskier than many stocks.

To help you choose low risk bonds, use bond credit ratings to determine the risk and safety of the bond. For example, you could get ratings like the following where AAA is the best:

• AAA
• AA+
• AA
• AA-
• A+
• A
• A-
• BBB+

These are the ratings used in the system of the S&P 500. There are also the Moody’s ratings and Fitch. Use these ratings to help you find appropriate bonds for your portfolio.

Are Stocks Riskier than Bonds?

Yes and no. Some stocks are and some stocks aren’t. Some bonds are very low-risk and other’s aren’t. The best thing you can do is find investments in a variety of categories and risk classes to diversify and keep your portfolio safe and earn as much money as possible.

The cost basis is used for any kind of investment. You must understand and calculate your average cost basis for stocks, or any type of investment, to have accurate records and information for your taxes. You may need this information for other purposes as well.

What is the Cost Basis?

Technically, the cost basis is the purchase price of an asset for tax purposes, adjusted for stock splits, dividends, and capital gains. In other words, you want to know how much money you earned or lost on your stocks after taking stock splits, dividends, and capital gains into consideration. The average cost basis is used to compute the cost basis.

How to Determine the Average Cost Basis for Stocks

To determine the average cost basis for stocks, first divide the amount you paid for your shares by the number of shares you own. It’s just that simple. This is how much your stocks cost you per share. You then use this value to determine the cost basis and the total gains or losses.

average cost basis = $ paid per share/# of shares

What Does this Mean for Your Taxes?

Basically, when you’re ready to do your taxes, make sure you determine your average cost basis and cost basis to help you figure out how much money to add to your taxes. Also, don’t forget about the type of tax. For example, if you sell stock long term, over 12 months, you will get a lower tax rate instead of having to pay your regular income tax rate. This is something to consider come tax season.