How to make money in real estate

Tutorial: Exploring Real Estate Investments

We're not looking at strategies for how to profit from real estate. Instead, this article will focus on the basic ways that money is made through real estate. And, fortunately for us, these haven't changed in centuries, no matter what kind of gloss the gurus of the moment try to put on it.

Appreciation
The most common source for real estate profit is the appreciation - the increase in the value - of the property in question. This is achieved in different ways for different types of real estate. And, most importantly, it is only realized through selling or refinancing. (For related information, be sure to check out Avoiding A Big Tax Bill On Real Estate Gains.)

Raw Land
The most obvious source of appreciation for undeveloped land is, of course, developing it. As cities expand, land outside the limits becomes more and more valuable because of the potential for it to be purchased by developers. Then developers build houses that raise that value even further.

Appreciation in land can also come from discoveries of valuable minerals or materials, provided that the buyer holds the rights. An extreme example of this would be striking oil, but appreciation can also come from gravel deposits, trees and so on.

Residential Property
When looking at residential properties, location is often the biggest factor in appreciation. As the neighborhood around a home evolves, adding transit routes, schools, shopping centers, playgrounds and so on, the value climbs. Of course, this trend can also work in reverse, with home values falling as a neighborhood decays.

Home improvements can also spur appreciation, and this is something a property owner can directly control. Putting in a new bathroom, upgrading to a heated garage and remodeling to an open concept kitchen are just some of the ways a property owner may try to increase the value of a home. Many of these techniques have been refined to high-return fixes by property flippers who specialize in adding value to a home in a short time.

Commercial Property
Commercial property gains value for the exact same reasons as the previous two types: location, development and improvements. The best commercial properties are in demand, and that drives the price up on them. (For related reading, see 7 Steps To A Hot Commercial Real Estate Deal.)

The Role of Inflation in Appreciation
Of course, there is one major factor we skipped in our summary - the economic impact of inflation. A 10% inflation of the dollar means that your dollar can only buy about 90% of the same good the following year, and that includes property. If a piece of land was worth $100,000 in 1970, and it sat dormant, undeveloped and unloved, it would still be worth many times more today. Because of runaway inflation throughout the '70s and a steady pace since, it would likely take over $560,000 to purchase that land today - assuming $100,000 was fair market value at the time and all other factors remained constant.

So, inflation alone can cause appreciation in real estate, but it is a bit of a Pyrrhic victory. Even though you may get five times the money due to inflation, many other goods cost five times as much to buy now. (Learn more in 5 Tales Of Out-Of-Control Inflation.)

Income
Generally referred to as rent, income - or regular payments - from real estate can come in many forms.

Raw Land Income
Depending on your rights to the land, companies may pay you royalties for any discoveries or regular payments for any structures they add. These include pump jacks, pipelines, gravel pits, access roads, cell towers and so on. Raw land can also be rented for production, usually agricultural production.

Residential Property Income
Although it is possible that you may earn income from the installation of a cell tower or other structure, the vast majority of residential property income comes in the form of basic rent. Your tenants pay a fixed amount per month - and this will go up with inflation and demand - and you take out your costs from it and claim the remaining portion as rental income. While it is true that you will get an insurance payout if your tenants burn down the place, the payout only covers the cost of replacing what is lost and is not income in a real sense.

Commercial Property Income
Commercial properties can produce income from the aforementioned sources - with basic rent again being the most common - but can also add one more in the form of option income. Many commercial tenants will pay fees for contractual options like the right of first refusal on the office next door. These are essentially options that tenants pay a premium to hold, whether they exercise them or not. Options income is sometimes used for raw land and even residential property, but they are far from common.

What About REITs or MICs?
Real estate investment trusts (REIT) and Mortgage Investment Corporations (MIC) are generally considered to be great ways of getting income from real estate. This is true, but only in the sense that real estate is the underlying security. With a REIT, the owner of multiple commercial properties sells shares to investors - usually to fund the purchase of more properties - and then passes on the rental income in the form of distribution. The REIT is the landlord for the tenants (who pay rent), but the owners of the REIT get the income once the expenses of running the buildings and the REIT are taken out.

MICs are even a further step removed, as they invest in private mortgages rather than the underlying properties. MICs are different from MBSs in that they hold entire mortgages and pass on the interest from payments to investors, rather than securitizing the interest streams independent of the original mortgage. Still, they are not so much real estate investments as they are debt investments, and thus outside of our area of interest. (Learn more in How To Assess A REIT.)

Smoke and Mirrors
Similar to securities with real estate underlying the investment, most of the alternative "blow your mind with super fantastic return" methods are merely a layer on top of these two basic steams of income.

For example, there are informal residential real estate options where you pay a fee to have the right to buy a house at a given time, say after a month, for an agreed upon price. Then, you find investors who will pay more than your option price for the property. In this case, the premium you get is essentially a finder's fee for matching a person looking for an investment with a person looking to sell - no different than a real estate agent. Although this is income, it doesn't come from buying (i.e. holding the deed to) a piece of real estate.

Similarly, no money down or OPM deals are simply the financing aspect of the deal - it doesn't change how the buyer is planning to make money in the long run.

The Bottom Line
If someone is trying to sell you on a new way to make money in real estate other than buying low and selling high or collecting rent, they're probably trying to sell you on the process of real estate investing rather than a new mechanism for making profits. Whether the process is worth it or not is up to you, but know that it doesn't change how money will be made (or lost) in the end.

For related reading, also take a look at 5 Types Of REITS And How To Invest In Them.

by Andrew Beattie (Contact Author | Biography)

Andrew Beattie is a managing editor and contributor at Investopedia.com.

Fundamental to liability adjusted cash flow yield

TUTORIAL: Financial ratios

Given the importance of both free cash flow and valuation, investors may want to consider adding liability-adjusted cash flow yield (LACFY) to their repertoire of analysis tools. LACFY offers investors an ability to quickly gauge the value of a company's stock relative to its free cash flow history and make relative valuation calls within an industry or sector, as well as a quick acid test of a company's dividend policy. Though LACFY is not perfect and does not work in all situations, it holds up well as a nearly and easy evaluation metric. (For more, check out free cash flow yield: the best fundamental indicator.)

Defining LACFY
The calculation of LACFY is straightforward. Take the historical average of a company's free cash flow (that is operating cash flow minus capital expenditures) and divide that number by the sum of market capitalization, liabilities and current assets net of inventory. LACFY is basically a measure of the "cash on cash" returns that outright on investor could expect if he or she owned the entire company.

In other words:

LACFY = 10-year average free cash flow÷ (market capitalization + total liabilities-(current assets - inventory))

This equation is simple, but it elegantly handles a few of the thornier aspects of cash flow-based methodologies exist. By using a multi-year average, LACFY largely neutralizes the year-to-year volatility that can come from working capital adjustments (running down inventory, for instance) or changes in cap-ex and can capture what should be a full economic cycle for a company.

How to use LACFY
LACFY can offer investors a handy way to assess the company's valuation relative to other instruments like a Treasury bond. The yield that the equation produces is readily comparable to a Treasury yield - if the stock is "yielding" more, it has passed one valuation hurdle and is worth further research. It is also possible to compare companies within the same industry using this metric. Care should be taken, though, to make fair comparisons - an emerging company with a few years of negative free cash flow mixed in will likely not stand up well against an established company that is harvesting cash from decades of brand equity and operating assets.

LACFY can also be a useful tool in assessing the quality and stability of a company's dividend. While a company has some short-term alternatives for funding a dividend that are independent of operations (issuing debt or equity, as well as selling assets), eventually dividends depend upon the free cash flow that a company can produce. If the company's dividend yield is above the LACFY, investors should dig deeper and assess whether that dividend is truly sustainable over the long term. (To learn more, see your dividend payout: can you count on it?)

Advantages of LACFY
Liability-adjusted cash flow yield removes the subjectivity of discount rates and growth projections from the valuation exercise. Though it is true that Wall Street is always looking forward at what a company will do, and LACFY looks back at what a company has done, it is so true that analysts and investors are often substantially over optimistic when it comes to future growth.

This method also produces a rather intuitive result - a "yield" number than can readily be compared to the yield on long-term Treasury securities. Perhaps it seems illogical to essentially use the same discount rate (the comparable Treasury bond) for all stocks, but consider this - the LACFY equation essentially imposes a discount on risky ideas like emerging growth stocks and volatile cyclical companies by virtue of that 10-year average. A steady cash flow producer like Coca-Cola will likely fare better than a new software company or cyclical copper miner.

LACFY of so forces investors to account for how a company is CAPI. In other words, a company that requires $100 of capital to produce $1 of free cash should not carry the same valuation as a company that needs only $10 to produce that same dollar of free cash flow. (Learn more in analyze cash flow the easy way.)

Drawbacks
LACFY shares a drawback common to all backward-looking analysis; It gives no credit to improvements that the company may make in the future and account does not for the fact that the future may be better (or worse). Emerging growth companies, then, will almost never fare well by this metric.

This approach is likewise problematic for turnarounds and companies with significant negative free cash flow in recent years. If a company has had negative or depressed free cash flow, LACFY is going to impose a much higher hurdle and investors may end up dismissing companies as "overvalued"

To some extent, investors can work around this. If a 10-year track record of free cash flow is not available, a five-year analysis may yet provide some useful information. Investors may also wish to adjust the 10-year average for years that were truly aberrant relative to the trend, but should be aware that tinkering too much can reduce the built - in discounting mechanism of that 10-year average. Likewise, at investor can reverse the equation to figure out the sort of cash flow to emerging company needs to be a good buy and whether that figure is realistic in a short time frame.

It is of so important to reiterate that LACFY is just one metric for at investor to consider; LACFY can be very useful as a filter, but it should not be the basis of buy/sell investment decisions. A company about to go into prolonged decline will look great by this metric (especially if the market is already aware and sold off the floor), while a young growth champion may look terrible. In other words, responsible investors must go deeper than whatever result the LACFY produces. (To learn more, read the top 3 pitfalls of discounted cash flow analysis.)

The bottom line
While not a one - stop decision maker, LACFY is nevertheless a useful tool in quickly assessing companies that may merit further scrutiny. Used properly, it is a tool that can point to undervalued cash flow generation, as well as potentially unstable or unsustainable dividend payers. Moreover, there are few other options that examine both cash flow and capitalization, as value investors may want to try LACFY as a screening and valuation tool in their stock research.

by Stephen Simpson, CFA (contact author |) (Biography)

Stephen Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto investing blog and can be reached there.

How to build a trading indicator

TUTORIAL: Technical Analysis

Background
Recall that the theory behind technical analysis states that financial charts take all things into account - that is, all fundamental and environmental factors. The theory goes on to state that these charts display elements of psychology that can be interpreted via technical indicators.

To better understand this, let's look at an example. Fibonacci retracements are derived from a mathematical sequence: 1, 1, 2, 3, 5, 8, 13 and so on. We can see that the current number is the sum of the previous two numbers. What does this have to do with the markets? Well, it turns out that these retracement levels (33%, 50%, 66%) influence traders' decisions to such an extent that the levels have become a set of psychological support and resistance levels. The idea is that, by finding these points on charts, one can predict the future directions of price movements. (For more on these handy numbers, check out Taking The Magic Out Of Fibonacci Numbers.)

Components of an Indicator
All indicators are created to predict where a price is headed when a certain condition is present. Traders try to predict two basic things: Support and resistance levels - These are important because they are the areas at which prices reverse direction. Time - This is important because you need to be able to predict when price movements will occur.

Occasionally, indicators predict these two factors directly - as is the case with Bollinger Bands or Elliott's waves - but indicators commonly have a set of rules enacted in order to issue a prediction. (For more basics, check out Support & Resistance Basics.)

For example, when using the breadth thrust indicator (which is represented by a line indicating momentum levels), we need to know which levels are relevant. The indicator itself is simply a line. The breadth thrust indicator looks similar to RSI, in that it is "range-bound," and it is used to gauge the momentum of price movements. When the line is in the median zone, there is little momentum. When it rises into the upper zone, we know that there is increased momentum, and vice versa. One could look to take a long position when the momentum is on the rise from low levels and look to short after the momentum peaks at a high level. It is important to set rules to interpret the meaning of an indicator's movements in order to make them useful.

With this in mind, let's look at ways of creating predictions. There are two main types of indicators: unique indicators and hybrid indicators. Unique indicators can be developed only with core elements of chart analysis, while hybrid indicators can use a combination of core elements and existing indicators.

Components of Unique Indicators
Unique indicators are based on inherent aspects of charts and mathematical functions. Here are two of the most common components:

1. Patterns
Patterns are simply repeating price sequences apparent over the course of a given time period. Many indicators use patterns to represent probable future price movements. For example, Elliott Wave theory is based on the premise that all prices move in a certain pattern that is simplified in the following example:

 Figure 1: An Elliott wave pattern
There are many other simple patterns that traders use to identify areas of price movement within cycles. Some of these include triangles, wedges and rectangles. 

These types of patterns can be identified within charts simply by looking at them; however, computers offer a much faster way to accomplish this task. Computer applications and services provide the ability to locate automatically such patterns.

2. Mathematical Functions
Mathematical functions can range from price averaging to more complex functions based on volume and other measures. For example, Bollinger Bands are simply fixed percentages above and below a moving average. This mathematical function gives a clear price channel showing support and resistance levels

Components of Hybrid Indicators
Hybrid indicators use a combination of existing indicators and can be thought of as simplistic trading systems. There are countless ways in which elements can be combined to form valid indicators. Here's an example of the MA crossover:

This hybrid indicator utilizes several different indicators including three instances of the moving averages. One must first draw the 3, 7 and 20-day moving averages based on the price history. The rule then looks for a crossover in order to buy the security or a cross-under in order to sell. This system indicates a level at which price movement can be expected, and provides a reasonable way to estimate when this will occur (as the lines draw closer together). Here's what it might look like:

 Figure 1: A moving average crossover
Creating an Indicator
A trader can create an indicator by following several simple steps:
Determine the type of indicator you wish to build: unique or hybrid. Determine the components to be included in your indicator. Create a set of rules (if necessary) to govern when and where price movements should be expected to occur. Test your indicator in the real market through back testing or paper trading. If it produces good returns, put it into use. An Example
Suppose we want to create an indicator that measures one of the most basic elements of the markets: price swings. The goal of our indicator is to predict future price movements based on this swing pattern. (For related reading, check out Using Technical Indicators To Develop Trading Strategies.)

Step 1
We look to develop a unique indicator using two core elements, a pattern and math functions.

Step 2
Looking at weekly charts of company XYZ's stock, we notice some basic swings between bullishness and bearishness that each last about five days. As our indicator is to measure price swings, we should be interested in patterns to define the "swing" and a mathematical function, price averages, to define the scope of these swings.

Step 3
Now we need to define the rules that govern these elements. The patterns are the easiest to define: they are simply bullish and bearish patterns that alternate every five or so days. To create an average, we take a sample of the duration of upward trends and a sample of the duration of downward trends. Our end result should be an expected time period for these moves to occur.

To define the scope of the swings, we use a relative high and a relative low, and we set these at the high and low of the weekly chart. Next, to create a projection of the current incline/decline based on past inclines/declines, we simply average the total inclines/declines and predict the same measured moves (+/-) occur in the future. The direction and duration of the move, again, is determined by the pattern.

Step 4
We take this strategy and test it manually, or use software to plot it and create signals. We find that it can successfully return 5% per swing (every five days). (Find out more in Backtesting And Forward Testing: The Importance Of Correlation.) 

Step 5
Finally, we go live with this concept and trade with real money. 

Bottom Line 
Building your own indicator involves taking a deeper look into technical analysis, and then developing these basic components into something unique. Ultimately, the aim is to gain an edge over other traders. Just look at Ralph Nelson Elliott or W.D. Gann; their successful indicators gave them not only a trading edge but also popularity and notoriety within financial circles worldwide.  

by Justin Kuepper (Contact Author | Biography)

Justin Kuepper has many years of experience in the market as an active trader and a personal retirement accounts manager. He spent a few years independently building and managing financial portals before obtaining his current position with Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other popular financial portals. Kuepper continues to write on a freelance basis, covering both finance and technology topics.

What investors should know about interest rates

If you ever find a subject to kill the conversation so you can be links alone to think your investments, start talking about interest rates. Your listener's eyes are guaranteed to glassy, and you'll quickly alone. If you have attachments, the theme is not as dry as you think. In fact it is understand some investors should try. Financial theory is that interest rates — that change all the time - are to the business valuation of fundamental importance, and an important role in how we put a price on shares. Here we take a look at the relationship between interest rates and stock price. (For background, the stock market affect reading, check out how interest rates.)

Tutorial: fundamental analysis 

Interest rates: the cost of money
Consider an interest rate costs money that - as well as the cost of production, labor and other expenses - a factor of a company's profitability.

The basic cost money to an investor is the Treasury Note rate, returning "full faith and credit is guaranteed by the" Government. Financial theory is that the share value proposition starts here: stocks are risky assets, even riskier than bonds, because bondholders your capital to shareholders in the event of bankruptcy are paid. Investors require therefore a higher return for the above additional risk by investing in stocks instead of Treasury notes, which are guaranteed to pay a certain return.

The extra return that investors can expect in theory held is called a "Risk premium". Historically, runs the risk premium to about 7%. This means that the risk-free interest rate (the Treasury Note rate) is 4%, then investors would require a return of 11% from a herd. Therefore the total return on a stock is the sum of two parts: the risk-free interest rate and the risk premium. If you want that higher yields, must invest in riskier stocks, because you a higher risk premium as, say, greater blue-chip companies offer. The theory select rational investors an investment with a return that is high enough for the lost opportunity to earn interest of guaranteed Treasury note and to compensate for taking on additional risk. (For more see the equity risk premium: more risk for higher returns.)

Risk and back: an inverse relationship
If the required increases return, the stock price falls, and vice versa. This makes sense: If nothing changes, the price must be lower for the investor, to have the required return. There is an inverse relationship between required return and share that assign a stock investors.

The required return may increase the risk premium or the risk-free interest rate increases. For example, may increase the risk premium for a company when you his top managers new members or when the company suddenly decides to cut its dividend payments. And the risk-free rate will increase if interest rates rise.

So, interest rate changes effects the theoretical value of the company and its shares: basically a share fair value is its projected future cash flows discounted to the present, by using the investor must rate of return. If interest rates fall, and everything else is held constant should increase the share value. This is why the market cheers when the Fed Announces a rate cut. Conversely, if the Fed (holding everything else constant) rates are the triggers, should share values fall.

How changes in interest rates on business
Interest rates impact a company's operations to. Any increase in interest rates that is worth it will increase its cost of capital. A company has therefore harder work to generate higher returns in an environment with high interest rates. Otherwise it is bloated interest expense way to eat your profits. Lower profits, lower cash inflows and a higher return for investors, all in depressed fair to translate value required for the company.

Moreover, if interest rate cost to such a level up shoot, the company pays has from its debt problems of cannot be threatened then its survival. In this case investors will demand that a higher risk premium. The fair value will fall this even further. (Find out which debts to your investment will corporate debt drag your stock below do?)

Finally, go high interest rates usually hand in hand with a sluggish economy. You prevent people buy things and companies invest in growth opportunities. As a result, revenues and earnings drop and so share prices.

Conclusion
Theoretically financial evaluation begins with a simple question: If you money in this business what are, the chances you will get back a better than if you invest something else? Interest rates play an important role in determining what this could be something else.

Ben McClure (Contact author |) (Biography)

Ben McClure is a long-time contribution to the Investopedia.com.

Ben is the Director of the Bay of Thermi limited, an independent research and consulting company which specialized in early stage ventures for new investments and markets prepare. He works with a variety of customers in North America, Europe and Latin America. Ben was a highly rated European equities analyst at London's old mutual securities, and introduced new venture development, a major technology commercialisation consulting group in Canada. He began his career as a writer/analyst at the Economist Group. Mr. McClure graduated from the University of Alberta's School of business with an MBA from.

Ben's investing hard and fast philosophy is that the Flock is always wrong, but heck, if it is worth it nothing is wrong with his sheep.

He lives in Thessaloniki, Greece. You can Bay of Thermi limited at www.bayofthermi.com more information.

Introduction to types of trading: fundamental traders

TUTORIAL: Investing 101

Reviewing Different Types of Traders
Before we focus on fundamental trading, let's review all the major styles of equity trading: Scalping - The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread. (You can read about scalping in Introduction to Types of Trading: Scalpers.)
Momentum Trading - Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit. 
Technical Trading - Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals. 
Fundamental Trading - Fundamentalists trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions.
Swing Trading - Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit. 

Novice traders might experiment with each of these techniques, but they should ultimately settle on a single niche, matching their investing knowledge and experience with a style to which they feel they can devote further research, education and practice. (You can read about technical trading in Introduction to Types of Trading: Technical Traders.)

Let's begin our exploration of fundamental trading.

Fundamental Data
Most equity investors are aware of the most common financial data used in fundamental analysis: earnings per share, revenue and cash flow. These quantitative factors can include any figures found on a company's earnings report, cash-flow statement or balance sheet; these factors can also include the results of financial ratios such as return on equity and debt to equity. Fundamental traders may use such quantitative data to identify trading opportunities if, for example, a company issues earnings results that catch the market by surprise.

Two of the most closely watched fundamental factors for traders and investors everywhere are earnings announcements and analyst upgrades and downgrades. Gaining an edge on such information, however, is very difficult since there are literally millions of eyes on Wall Street looking for that very same edge.

Earnings Announcements
The most important situation surrounding earnings announcements is the pre-announcement phase, the time in which a company issues a statement stating whether it will meet, exceed, or fail to meet earnings expectations. A trader will want to trade immediately after such an announcement because a short-term momentum opportunity will likely be available.

Analyst Upgrades and Downgrades
Similarly, analyst upgrades and downgrades may present a short-term trading opportunity, particularly when a prominent analyst unexpectedly downgrades a stock. The price action in this situation can be similar to a rock dropping from a cliff, so the trader must be quick and nimble on his short-selling buttons.

Earnings announcements and analyst ratings are actually closely associated with momentum trading, which keeps alert to unexpected events that cause a stock to trade a large volume of shares and move steadily either up or down.

The fundamental trader is often more concerned with gaining an edge on information about speculative events that the rest of the market may lack. To stay one step ahead of the market, astute traders can often use their knowledge of historical trading patterns that occur during the advent of stock splits, acquisitions, takeovers and reorganizations.

Stock Splits
When a $20 stock splits 2-for-1, the company's market capitalization does not change, but the company now has double the number of shares outstanding, each at a $10 stock price. Many investors believe that, since investors will be more inclined to purchase a $10 stock than they would a $20 stock, a stock split will soon increase the company's market capitalization, (but remember that this fundamentally doesn't change the value of the company).

To trade successfully on stock splits, a trader must, above all, correctly identify the phase at which the stock is currently trading. Indeed, history has proven that a number of specific trading patterns occur before and after a split announcement: price appreciation and therefore short-term buying opportunities will generally occur in the pre-announcement phase and the pre-split run-up; and price depreciation (shorting opportunities) will occur in the post-announcement depression and post-split depression. By identifying these four phases correctly, a split trader can actually trade in and out of the same stock at least four separate times before and after the split, with perhaps many more intra-day or even
hour-by-hour trades.

Acquisitions, Takeovers and Reorganizations
The old adage "buy on rumor, sell on news", applies to trading on acquisitions, takeovers and reorganizations. In these cases, a stock will often experience extreme price increases in the speculation phase leading up to the event and significant declines immediately after the event is announced.

That said, the old investor's adage "sell on news" needs to be qualified significantly for the astute trader. A trader's game is to be one step ahead of the market, so he or she is very unlikely to buy a stock in a speculative phase and hold it all the way to the actual announcement. The trader is concerned about capturing some of the momentum in the speculative phase, and may trade in and out of the same stock several times as the rumor mongers work their magic. He may hold a long position in the morning and short in the afternoon, being ever watchful of charts and Level 2 data for signs of when he or she should change position.

And when the actual announcement is made, he or she will likely have an entirely different trading opportunity: the trader will likely short the stock of an acquiring company immediately after it issues news of its intent to acquire and thereby ending the speculative euphoria leading up to the announcement. Rarely is an acquisition announcement seen positively, so shorting a company that is doing the acquiring is a doubly sound strategy.

By contrast, a corporate reorganization may very well be viewed positively if the market had not been expecting it, and if the stock had already been on a long-term slide due to internal corporate troubles. If a board of directors suddenly ousts an unpopular CEO, for example, a stock may very well exhibit short-term upward movement in celebration of the news.

Trading the stock of a takeover target presents a special case since a takeover offer will have a price per share associated with it. A trader has to be careful to avoid getting stuck holding stock at or near the offer price because the stock will generally not move significantly in the short-term once it finds its narrow range near the target. Particularly in the case of a rumored takeover, the best trading opportunities will be in the speculative phase, the time in which a rumored price per share for the takeover offer will drive actual price movement.

Rumor and speculation are risky trading propositions, especially in the cases of acquisitions, takeovers and reorganizations - such events may spawn extreme stock-price volatility. Because, however, of the potential for rapid price movements, these events also potentially serve as the most lucrative fundamental-trading opportunities available. (You can read about swing trading in Introduction to Types of Trading: Swing Traders.)

Conclusion
Many trading strategists have developed rather sophisticated models of trading opportunities associated with events leading up to and following earnings announcements, analyst upgrades and downgrades, stock splits, acquisitions, takeovers and reorganizations. These charts resemble the charts used in technical analysis, but lack the mathematical sophistication. The charts are simple pattern charts. They display historical patterns of trading behaviors that occur close to these events, and these patterns are used as guides for making a prediction about short-term movement in the present.

If fundamental traders are able to correctly identify the current position of stocks and subsequent price movements that are likely to occur, they stand a very good chance of executing successful trades. Trading on fundamentals may be risky in cases of euphoria and hype, but the astute trader is able to mitigate risk by making history his or her guide to short-term trading profits. In short, do your homework before jumping in.

by Jason Van Bergen (Contact Author | Biography)

The basics of spousal support taxation

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The growing divorce rate in America has led to the creation of various types of spousal support where one ex-spouse is required to pay to the other. In most cases, the higher-earning spouse is required to pay the lower earner a certain amount, although there are exceptions to this. However, the tax rules are not the same for all types of support - some types are reportable as income while others are not. That said, the rules for each kind of support are relatively simple to learn. This article explores the factors that determine how spousal support is classified and subsequently taxed. (For related reading, check out Get Through Divorce With Your Finances Intact.)

Tutorial: Financial Concepts

Types of Spousal Support
There are two main types of support that are awarded to ex-spouses today. One is known as alimony and the other is called child support. The former type of support has become relatively less common over time and has largely been replaced with child support for divorcing couples with children. Both types of support are awarded by either a divorce decree, written agreement of separation or decree of support. Failure to pay either one of them can result in further legal action, including garnishment of tax refunds of the payor or additional litigation by the rightful recipient. Different regions typically have different laws that outline the consequences of nonpayment.

Alimony
This type of spousal support is often awarded in divorces where children are not involved. In most cases, alimony payments are tax deductible by the payor and reportable as taxable income by the recipient. However, the following requirements must be met to receive this tax treatment:

Alimony must be clearly specified in the divorce, annulment or separation agreement. No payments that are made under any circumstances outside this agreement can be labeled as such. Alimony must be specified as a mandatory payment in the agreement. Any voluntary payments that are made to one ex-spouse by the other cannot be considered alimony and are not deductible or taxable for the payor or receiver respectively. Alimony payments must be made in cash, or through such liquid payments as checks and money orders. All transfers of noncash property fall outside this category. Deductions of aggregate alimony payments of more than $15,000 that are made in the first or second year may be recaptured in the second or third year if a lesser payment is made that year. (The rules pertaining to this provision are somewhat complicated and those to whom they apply should seek counsel from their tax or financial advisor.) Any provision that payments made to an ex-spouse for the purpose of supporting children or dependents automatically disqualifies the payments as alimony. Payments made by one ex-spouse to another cannot be considered alimony if both spouses still live in the same household when the payments are made. Alimony payments cannot last beyond the death of the paying spouse. If payments are continued into the recipients active accounts, none of the payments can be deducted for tax purposes. Alimony can also be nondeductible and therefore nontaxable if both spouses agree to specify this in the divorce decree.

Alimony paid is reportable as an above-the-line deduction, which means that the payor is not required to itemize in order to deduct these payments. Taxpayers who pay alimony must include the Social Security number(s) of any and all ex-spouses to whom payments are made in order to deduct the payments. Failure to do so will result in disallowance of the deduction. Those receiving payments must provide their Social Security numbers to the paying spouse or face a penalty from the IRS.

Child Support
This form of spousal support is specifically designated to be for the benefit of any children that are supported by the ex-spouse receiving the payments. Child support is never deductible by the payor and is not reportable or taxable as income by the recipient. Any type of monetary payment made by one ex-spouse to another that either ceases, diminishes or otherwise changes upon the occurrence of certain events pertaining to the children, such as their reaching the age of majority or moving out of the house, results in a modification to child support requirements. As mentioned previously, both the IRS and state governments have the authority to garnish any tax refunds due to delinquent payors of child support.

Property Settlements and QDROs
Any initial division of property that is made because of a divorce is usually considered a tax-free exchange of property by the IRS. The recipient takes on the basis of any property received and pays no income tax upon its transfer. Any type of IRA or retirement plan that is transferred from one spouse to another under a qualified domestic relations order (QDRO) is also considered a tax-free exchange of property. (Learn how different rules of asset handling apply to various retirement plans. Read Getting A Divorce? Understand the Rules Of Dividing Plan Assets.)

Which Type of Payment is Better?
As you can see, alimony payments obviously favor the payor, while child support payments are more beneficial to the recipient from a tax perspective. However, there are several factors that divorcing couples should consider when determining the nature and amount of payments that are to be made. Of course, the issue of who will get to claim the dependency exemptions and tax credits for any children involved as dependents is another key issue. If one spouse’s income is too high to be able to claim any potential tax benefits benefits, then it may be wise to allow the other spouse to do so, perhaps in return for receiving taxable alimony payments instead of child support. If the receiving spouse’s income is fairly low, then receiving alimony payments may have little or no impact upon his or her income, and therefore may be elected in return for other benefits to be provided by the payor, such as a more favorable custody agreement. The nature of the payment requirements also depend on the overall circumstances of the divorce.

Bottom Line
Of course, the good will of both ex-spouses is necessary to logically determine what arrangement is best for both parties; therefore, divorcing couples should recognize that it is in both parties' best interests to know these rules and plan accordingly. Failure to understand the tax implications of divorce can often lead to missed credits and deductions that ultimately reduce the income of both parties involved. Couples who are contemplating divorce or who have begun the divorce process may be wise to consult a professional with specialized training in the financial ramifications of divorce, such as a certified divorce specialist. (Use your skills to help people preserve their financial integrity in a failed marriage. Find out more in Become A Certified Financial Divorce Analyst.)

by Mark P. Cussen,CFP®, CMFC (Contact Author | Biography)

Mark P. Cussen has more than 15 years of experience in the financial industry, which includes working with investments, insurance, mortgages, taxes and financial planning. He has two years of experience in writing and editing insurance and securities test training manuals, as well as other financial topics. He has also worked in retail, discount and bank brokerage systems and been involved in a venture capital enterprise in the oil and gas sector. Cussen has a Bachelor of Science in English from the University of Kansas and completed his CFP coursework at the Bloch School of Business at the University of Missouri-Kansas City in August of 2001.

5 Investment, you in a plan IRA / qualified can keep

For millions of Americans, the freedom of the offered ones self-directed, traditional and Roth IRAs can very appealing. These accounts are not limited to the narrow selection of investments offered generally within old-age provision financed by employers such as 401 (k) or 403(b)-Pläne. Almost any type of investment is allowed within an IRA including stocks, bonds, mutual funds, pensions, unit investment trusts (UITs), exchange traded funds (ETFs) and even real estate. Qualified plans are, most any kind of security and, to keep although mutual funds, bonds and shares in the company tend to the three primary vehicles used in these plans for various reasons. But there are some limitations on the kinds of investments that can be kept inside retirement accounts; This article examines the list of prohibited investment alternatives, housed within a tax-deferred retirement account can not. TUTORIAL: 401 (k) and qualified plans

Prohibited investments
The list of investment vehicles not housed inside should be confused an IRA and qualified plan with the list of prohibited transactions, that with these accounts as you borrow money from an IRA can. The question about the types of investments within IRAs and other retirement plans can be used to most teachers and experts in pensions list of unauthorised vehicles simply and then add the caveat that everything under the Sun is allowed. (Learn more avoid "Forbidden transactions" in your IRA.)

The list of investments within IRAs and other retirement plans can be used, is divided as follows:

Life insurance
As a rule of thumb titled no kind of life insurance as an IRA or qualified plan or placed in such an account or plan. Term and variable policies of sums for IRAs include whole life, universal, SEP and simple plans. Qualified plans contain an exception to this rule, known as the incidental benefit rule. This rule mandates that qualified plans are allowed to a small amount of life insurance for a specific purchase plan participants. Since the main purpose of the plan is to provide retirement benefits, the amount of death qualify however needs "random" compared to the plan balance.

The type of test that determine the IRS uses this amount depends on the kind of insurance which is acquired in the plan. Defined contribution plans, the whole life insurance to buy 50% test of mandates that the premium in the plan per employee 50% purchased the total employer contribution (plus any forfeitures plan) not to exceed each employee account meet. Term and universal policies, the limit is 25% of employer contributions plus forfeitures. (Interested in non-traditional investments?) Ensure that you follow the rules for the transactions avoid verbotener, see IRA assets and alternative investments.)

Derivatives
Virtually any type of derivative contracts is in IRAs and prohibited pensions of whatsoever. This includes all futures and options contracts as well as Forex holdings. The only exception to this rule applies to traditional and Roth IRAs. Investors are allowed to write covered calls within these accounts, but you need to sell your calls to open your location. You can buy again to close the calls to the position, but it is not possible to open calls in a position to buy. (For more information about this topic advanced, check out the basics of covered calls.)

Antique collectibles
An IRA owner discovered a collectible or antique worth thousands of dollars on sale at the flea market will be able to protect the tax on the gain from the sale of this asset within an IRA or other retirement plan. Stamps, furniture, porcelain, antique silverware, baseball cards, comics, art, gems and jewelry, fine wine, electric trains and other toys can be made in these accounts under any circumstances.

Real estate
Contrary to what many believe is possible to keep real estate directly within an IRA. But can not the IRA owner directly from the property in any sense how such as benefit by receiving rental income or living in the property. It is not possible, one's home with IRA or retirement plan money to buy. Many IRA custodians can do direct ownership of real estate or oil and gas interests, and those often free annual fee much higher than normal, facilitating. (See House your retirement with self directed real estate IRAs.)

Coins
As are all other kinds of collectibles, most coins made of gold or any other precious metal with a few exceptions, such as not allowed:

American Eagle coins (proof and non-proof) American gold Buffalo coins (non proof) American silver Eagle (detection and non-) Australian gold Philharmonic coins, the Canadian maple leaf coins

Within an IRA may be held, is very pure in your mineral content and not seen as a collector's coin coins need. Krugerrand and the old double eagle gold coins are not allowed because they correspond to this standard. Gold coins that determines the IRS may have more actual monetary value as a collection however permissible.

The bottom line
The list of investment that can be taken inside of IRAs and other retirement plans is tiny compared to the huge range of vehicles that can be used. However, it is useful to know what can be concluded within these accounts in some cases. Consult your retirement or financial advisor for more information about prohibited investments within IRAs or other retirement plans. (Learn how with the tax man to avoid getting gouged when you convert your plans, see work, how posts your taxes affect the IRA)

by Mark s. Cussen, CFP ®, CMFC (contact author |) (Biography)

Mark p. Cussen has more than 15 years experience in the financial sector that includes working with investment, insurance, mortgages, tax and financial planning. He has two years experience writing and editing of insurance and securities test training manuals and other financial topics. It has oil and gas also worked in retail, discount or bank brokerage systems, a venture capital firm in the area involved. Cussen has completed a Bachelor of Science degree in English from the University of Kansas and his GFP coursework at the Bloch School of business at the University of Missouri-Kansas City in August 2001.