Let's Head Southwest

Looking at my budget so far this year, transportation accounts for 32% of my spending!  And you have to take into consideration that I never drive so gas isn't even a factor in that spending.  Of course, it is understandable that as a college student across the country, flying should take up a considerable amount of my budget, but perhaps it is a large factor in many other demographics.

I'm going to spend this post talking about my favorite discount airline, Southwest.  An important thing to know is that they don't sell tickets anywhere but their website.  This means if you use travelocity, expedia, or some other flight booking website, you will miss out on Southwest tickets.  But before we get into the pricing, let's take a look at how Southwest differs from some other airlines.

Only Death and Taxes

Possibilities of Good Credit

What are the benefits of a good credit score?  First of all, what does qualify as a good score?  The line drawn might differ depending on who you ask, but a 740 or higher would put you in the top third of Americans.  It will get you some of the lowest rates on home and auto loans.  However, a good credit score also gets you lower rates on credit cards and better cash back deals.  Also, when purchasing a car and looking for financing, dealers will typically be locked into preset rates for financing; but, you could talk about finding better loan offers elsewhere to leverage in negotiating the sticker price.  If you are looking for a vacation home or (more likely for college students) a place to rent, a high score usually is a sign of a responsible tenant which will help again in your negotiations for price.

Buying Direct

There is an alternative method to buying stocks from a broker.  Investors can try to buy stocks directly from a corporation through a DSPP (Direct Stock Purchase Plan).  For some companies, the commission that you pay is $0.  This allows investors to slowly add shares of a company to their portfolios over time without having to build up a sum of money to purchase all at once (otherwise, you'd be paying a very large percentage of your investment in commissions).  There is usually a fee to sell shares, but hopefully, the stocks you pick for buying direct are for the long-term.  Some companies do have fees to buy shares, but they are generally less than broker's depending on the company.  Most of the ones who offer a DSPP are blue chip stocks like P&G or Microsoft.  You can find a company's DSPP plan if they have one on their website under the investors tab.  Or you could probably google search it.

The 411 on the 401k

What's a blog post about retirement doing in the middle of the stock series?  I thought it would be good to take a break from brokers and stocks and some internships students get during the summer offer a 401k enrollment.  Although many college students probably think they are too young to think about retirement, some of these decisions should be looked into early on, especially since most of the benefits of retirement plans come from untaxed or deferred tax on growth of your earnings.  This means that the earlier you get a retirement plan and invest, the more money you will earn and the more you'll save in taxes over your lifetime.  I'll just be introducing the 401k and talk about other retirement plans such as IRAs later on.

TradeKing Review

Have you already decided on a broker yet?  If not, let me make a recommendation for TradeKing.  As I discussed in my earlier post, when I started I went out to look at discount brokers.  I wanted to minimize the cost of commissions for trades so I first compared prices.  I'll say upfront that TradeKing is definitely not the lowest out there.  I believe Optionshouse has cheaper commissions for both stocks and options (more on this financial derivative later) but TradeKing had a better reputation of customer service as well as a referral bonus.

Your Orders, Sir?

This is going to be a very brief introduction to the types of orders you can make in order to purchase stocks and other similar securities like ETFs or mutual funds.

First off, if you look at www.google.com/finance or any other financial webpage, you can usually see the real-time (or close to real-time) prices of the stock market during trading hours (9:30am-4pm EST).  If you can imagine it, try picturing yourself walking in a supermarket.  As you go down one aisle, the stock aisle, you see all these different products and the price tags of each one changing every couple seconds by some cents.  This is kind of what the stock market is like during trading hours.  Prices fluctuate up and down.  Usually, big changes happen in between market hours so prices open (the price the stock begins the trading day with) at a much higher or lower price than the previous close (the price stocks ended yesterday's trading day).  Sometimes, when big economic reports or earnings reports come out, you can see a large spike or drop in a stock price in the middle of a trading day.

So how does this affect you?  Obviously, the price you buy or sell stock is very important.  There are several different types of orders that you can use with your broker: market, limit, stop, stop limit, market on close, and some other more complicated ones.

How To Buy Stocks?

I've talked a lot about why you should invest in stocks, especially if you are looking over a long time horizon, but you may not know too much about the process.  There are a couple ways to actually purchase stock, but I will mainly look at the primary method for most ordinary investors: a stock broker.

The two types of stock brokers are full-service brokers and discount brokers.  I am personally most familiar with discount brokers, but I will mention what I do know about full-service.  Full service brokers often charge a higher premium for their work and generally offer more in terms of research, financial advice, retirement planning, tax tips, etc.  Full service brokers include Edward Jones, Goldman Sachs, and Merrill Lynch.

Discount brokers, on the other hand, charge a much cheaper commission and offer a much simpler product.  The most important difference is the price: discount brokers are usually around 1/20th the cost of full-service brokers.  This makes them much more attractive for investors who do not want full financial planning service and instead want to just put some money into stocks, bonds, etc.  Discount brokers include TradeKing, Zecco, Optionshouse, Fidelity, and Scottrade.

The Feeling is Mutual

So you've read about why you should invest in stocks and the handy ETF security, but you're probably wondering what those mutual funds that you hear here about really are.  A mutual fund is a pool of money collected from investors and put into different stocks and other securities of different asset classes.  Sound familiar?  It should.  Mutual funds are very similar to the ETFs we just talked about.  However, instead of tracking a specific index, mutual funds are actively managed by money managers.  The main goal is to give smaller investors access to professionally managed, diversified portfolios which would be more difficult to create with a smaller amount of money.  By pooling together money from many people together, the fund makes it easier to invest it many securities.  However, students and investors should be aware of the fees that mutual funds have which often eliminate much of the gains you can make from such an investment.

Best of May

The Best of May
1. How to Budget
2. Why Budgeting
3. Diversifying Your Risk
4. Credit Card Recommendations
5. Introduction to Bank Accounts

I thought I would take a post to go back through the best of May, at least in terms of viewers.  I know that it is biased for posts that were made earlier on since they had more days available on the website to be read, but I sincerely believe some of these most read posts are what people are looking for in terms of learning something new about personal finance.