The stock market is where publicly listed companies trade shares of stock to the public at an agreed price. The stock market is one of the most important ways for companies to raise money for continued growth.

However, investing in the stock market gives no guarantee that your money will earn more. Although a savings account has a pitiful interest rate, you can be rest assured that come end of the month or year, your money will have grown at the promised rate. The stock market is not the same. Even though the returns are high, there is an equal amount of percentage for failure. So why is investing in the stock market so popular? It’s because when you win, your returns are high. So much so that trading in stocks has made millionaires out of paupers, and paupers out of millionaires.

Below is a list of traits and skills that you need to be able to be a successful trader.

Sound grasp of financial principles
If you can’t even read a financial statement, don’t bother. You can still trade, but you will leave the decision making to your broker. That is if you trust him that much. Knowledge of financial principles will give you insight into how a company is performing, that is – if a company has a multitude of assets but a greater number of liabilities, then consider it a shaky investment.

Risk behavior
If you are the type of person who is risk-averse but wants guarantees in your investment, then stock trading is not for you. Go and invest in Treasury Bonds, Commercial Papers, and Debt Instruments from big companies as these will guarantee your investment.

Money
Stock trading is highly recommended to people with extra money that they can afford to lose. As mentioned in the introduction, people have become millionaires in stock trading, but plenty have lost their shirts.

Broker or a trading system
Financial institutions have brokers which do the stock trading for the ordinary folk. They get commissions out of each trade they perform, whether it is a buy or a sell. In order to trade with them, you need to apply for an account. Choosing the right broker is as much important as trading itself as some brokers can anticipate quickly the market’s movement as opposed to the rest.

The stock market is one of the most readily available investment tools that one can use. Rewards and losses largely depend on a person’s orientation in terms of taking on risks. But knowing the nuances slightly helps tip the favor towards you.

These are issued by municipalities that wish to raise capital for projects such as schools, roads, bridges, healthcare, or other benefits to its citizenry. They are tax-free because of the federal government’s stand that it is for the benefit of the constituents.

There are two types of Municipal Bonds:

1. General Obligation Bonds. These are IOU’s that are backed by the taxing power of the issuing agency. A municipality with a lot of business establishments is more capable of paying off these IOU’s than one with a small population.

2. Revenue Municipal Bonds. These are issued by an agency, commission or authority that is created by the local council, such as water agencies, light and power, and other utilities. It is guaranteed by the revenue that these businesses will generate.

Although it is quite tempting to bite tax-free munis, one must do a little research before jumping into investing. First, you must take a look at the credit rating of the municipality. Do credit agencies have high confidence in them?

Second, take a look at their area of jurisdiction. Is it a growing community or one that is over crowded? What are the plans of the city for the future? Do they have goals that they are trying to reach? If so, do these coincide with a progressive outlook?

As with any type of investment, it pays to know potential risks against the returns you will get.

Banks normally offer these accounts to valued clients generally those that make a large initial deposit, keep the account untouched at long intervals, and probably do business with the bank in some other way to qualify.

So how do you find these High Yield Savings Accounts? First and foremost you must ask your local bank if they have one and what it takes to qualify. If, however, they don’t have one, then we suggest that you scour the Internet.

Internet banking is convenience personified. No lines, no crowds, just basic banking from the comfort of your office. If you are comfortable banking online, then you might want to search for “High Yield Savings Accounts.” There is a lot so better check out the companies offering it.

Remember the rule of thumb: “if it’s too good to be true, then it mustn’t be real.” Some companies will offer ridiculously high rates but would have no real infrastructure to be able to make your money grow. Does the phrase “ponzi scheme” ring a bell?

But how valuable is it to convert to a ROTH IRA now?

Specific advantages:

• Perhaps the recent heavy stock market losses wore down the value of your traditional IRA. This should alert you that the federal income tax on your future withdrawals could further erode your nest egg. Therefore, since conversion from a traditional IRA to a ROTH IRA generates a tax bill, but only on the year of conversion after which the new ROTH IRA balance can be withdrawn tax-free (subject to the 2 above-mentioned stipulations), today could be a golden opportunity to reduce your tax bill by paying taxes corresponding to smaller amount.

• This also means that you can choose to settle your tax obligations upfront, while tax rates are lower, and deal with tolerable restrictions in the future. With a deductible IRA for example, you can only start your principal withdrawals after reaching the age 70 ½. In contrast, you only need to wait for 5 years (also known as the “seasoning period”) after converting to ROTH IRA before you can start federal income tax free principal withdrawals.

• If conversion to Roth IRA will prove to be ill-advised, a grace period is provided for you to reverse your decision. From the date of conversion, you have until October 15 of the following year to re-characterize your converted account back into its traditional IRA status without owing any federal income tax (applicable to year it was converted) to the newly-re-characterized conversion.

Income requirements for conversion: Current & 2010

Current requirements state that taxpayers must have a Modified Adjusted Gross Income (MAGI) of less than $100,000 for both single and married filing in order to take advantage of the ROTH IRA conversion. The good news is, taxpayers who have always wanted to convert but could not qualify based on the incomelLimit requirements may start converting in 2010, when this restriction is lifted.

Moreover, under the new 2010 IRS rule (which is applicable to 2010 only), if you convert a traditional IRA into Roth IRA, you may distribute the converted amount to 2011 and 2012, which gives you the option not to pay any taxes in 2010 on the amount converted.

Before your final decision…

All these advantages being laid out, every taxpayer has specific needs and standards on or before retirement, and owing to the complex relationship among a person’s income, lifestyle status and the host of IRA options in the market, it is always best to consult a tax professional before converting an existing retirement account. This ensures a better grasp of how the ever-changing tax rules would affect you.

Traditional IRAs (tax deferred)

The contributions for a Traditional IRA are of the “tax-deductible” kind. That means that, depending on certain factors which include your income tax filing status, adjusted gross income (AGI), and eligibility to participate in a tax-qualified retirement plan through employment, the money you deposit in your IRA isn’t taxed. And regardless, whatever earnings you have on your contributions over the years the IRA is opened won’t be taxed until you withdraw that money many years later.

For example, let’s say you made $36,000 during the year, and you put $2,000 of it into an IRA. You would pay income tax on only $34,000. Additionally, your deposit will grow free of tax through the years. When you finally withdraw the money for your retirement (after age 59 ½) then, and only then, will the money be taxed as income at your ordinary income tax rate. Also keep in mind all money must be withdrawn from the account no later than the April 1 following the year the owner turns 70 1/2.

If you withdraw the funds before age 59 1/2, then in most cases you’ll have to pay both income tax and a 10% penalty on whatever earnings have accrued — but if the funds are used to pay for “qualified higher education expenses” or for one of the other 8 exceptions (including death or disability) then the 10% early withdrawal fee will be waived.

Remember that you can put just about anything you want in an IRA account. While CDs are a safe bet, they tend to have lower long-term returns than riskier investments – which means you’re taking a risk that inflation could erode your returns. Just ask your great Aunt Gertie how much things used to cost when she was young to get an idea of inflation’s effects.

If you are willing and able to accept the additional risks (i.e. you could lose money), you can invest your IRA money in mutual funds or stocks. Especially for those who have more time until they pull their money out of an IRA, mutual funds can be a good choice.

Roth IRA (tax free)

The tax breaks for a Roth IRA are different than a Traditional IRA. Unlike a contribution to a Traditional IRA, a Roth IRA contribution is never deductible. Taking the above example on your yearly earnings, you’d still be taxed on $36,000 even though you had put the same $2,000 into a Roth IRA. However, when you withdraw the money from a Roth IRA, none of it — and that includes the earnings — will be taxed, assuming that the Roth IRA has been open for at least five tax-years and you are older than age 59 1/2. That’s right – no tax on the entire account! All you have to do is to wait until you can withdraw it penalty-free.

In other words, the Roth offers tax-exempt rather than simply tax-deferred savings. While both allow you to accumulate wealth without paying taxes along the way on your profits, the traditional IRA ultimately sticks you with a tax bill for those profits (plus your initial contributions if those were deducted when made). The Roth doesn’t. As long as you follow the rules, you never pay taxes on your gains. So paying the taxes now before contributing to the Roth may work out to be better for you than paying taxes later on your investment profits.

The Roth makes great sense for people otherwise limited to making non-deductible contributions to a traditional IRA. And the Roth is fully available to single filers making up to $95,000 and couples making up to $150,000. It also allows you great flexibility by allowing you, in many cases, to withdraw your principal contributions at any time tax-free, without penalty. First-time homebuyers can also pull out $10,000 in profits penalty free and tax-free if the money has been in the Roth IRA for at least five tax years. Barring these exceptions, though, early distribution or profits withdrawn before retirement age and before the money has been in the Roth for at least five tax-years will be taxed, plus you’ll also incur a 10% penalty when those earnings are taken before age 59 1/2.

So Which to Choose?

The answer depends on your current tax bracket, your anticipated tax bracket in retirement and when you expect to begin withdrawing funds. Briefly, you will have an advantage from contributing to a tax-deductible Traditional IRA only if you can deduct the contributions from your taxes and anticipate being in a lower tax bracket in retirement. If you expect to be in the same or a higher tax bracket in retirement, then a Roth IRA may be preferable because you’ll be able to make completely tax-free withdrawals, provided you meet the 5-year holding period and have reached age 59½.

Additionally, in a Roth IRA, you’re not required to begin minimum withdrawals at age 70½. This makes the Roth IRA ideal for estate planning, since you can potentially leave more funds to your beneficiaries.

Figuring out what capital gains rate you pay depends on several things; including how long you have owned the asset, your income level and what category it falls under.  The long-term capital gains rate is for assets held a year or longer and are thus taxed at a lower rate.  For assets sold before a year, the short-term capital gains tax rate taxes you at your ordinary income tax rate up to 35%. Keep in mind, in additional to the federal capital gains tax rates, your capital gains will be taxed by your state. Most states do not have separate capital gains tax rates. Instead, most states will tax your capital gains as ordinary income subject to the state income tax rates.

On January 1, 2008 a new zero perect long-term capital gains rate went into effect for indivudals in the 10% and 15% tax brackets. This means any long-term assests they sell will be exempt from capital gains taxes. This zero percent rate is scheduled to expire at the end of 2010, when capital gains rates will increase to at least 10%.  For everyone else in the top four income-tax brackets (25%, 28%, 33% and 35%), the Bush Administration lowered their tax rates to 15%.

While the tax rates of 0% and 15% for long term capital gains has recived the most attention there are 2 other categories to be aware of.  The first is the rate of 25% which applies to part of the gain from selling real estate you deprciated. Real estate investors are allowed to depreciate their rental properties and enjoy the positive cash flow resulting from write-off tax depreciation.  But the IRS is now recouping some of the tax breaks you have been getting via deprciation throughout the years by taxing you at the 25% level.  The second rate is 28% and it applies to small-business stock and collectibles. A qualified small-business stock held for more than five years, is taxed at 28% but only on half of the gains.  This was done to encourage investing in small businesses. Other gains taxed at the 28% include the proceeds from the sale of artwork, gems, precious metals, stamps, coins and even wine collections.

For more information about capital gains rates visit www.irs.gov.

Direct Distribution vs. IRA

If you decide to take out everything, you need to pay your taxes on that lump sum payment in the same year you received it.  After that, you can do as you please with what’s left of your money.  The sole benefit of a direct distribution is that you may be eligible for a special tax rate.  The IRS may, if you were born earlier than 1936, tax you based on a ten-year-average tax rate.  This is of course lower than current tax rates.  The IRS may also charge you using a capital gains tax rate for that part of your package which was received in the form of shares or stocks.  If you don’t qualify for any of these, you will end up paying based on your regular income tax rate.

However, if you decide to roll-over your distribution into a traditional IRA and apply for a 72t IRA Distribution, you won’t have to pay the 10% early withdrawal penalty usually charged to retirees who withdraw their retirement package before reaching the age of 59 ½.  Amounts that are rolled-over to an IRA, including gains and earnings, are non-taxable until they are distributed.  In short, rolling your funds over to a 72t IRA allows you to postpone tax payment, not avoid it.

What is a 72t IRA Distribution?

A 72t IRA Distribution offers three payment or distribution options for early retirees.  The annual or monthly distribution is normally based on three factors – retiree’s age, age of beneficiary and the amount of money a retiree has.  These options are the minimum distribution method, amortization method and annuity method.

A 72t, once started, must continue to run for a minimum of five years or until the early retiree reaches the age of 59 ½, whichever is longer.  Once your 72t stops, you can then get everything out, pay your tax due (as you would have in a direct distribution scheme) but you won’t have to pay the 10% penalty.

Seeking Professional Advice

It is important that an early retiree who plans to roll-over his plan to an IRA using the 72t IRA distribution should consult with tax advisers, CPAs, lawyers, and other professionals who are well-informed and experienced with initiating and administering 72t roll-over arrangement.  For example, identifying which distribution option best suits your needs can be tricky.  This is due to the fact that a minor mistake or change on your part can end up with you paying the 10% penalty which you would have been able to avoid otherwise.  Please note, however, that once you choose either the annuity or amortization method, you are allowed a one-time option to switch to the minimum distribution or life expectancy method without incurring the 10% penalty.

Variable Annuities

The most effective investment tool for a 72t is a variable annuity.  Variable annuities allow an IRA holder to actively use his money in investments, therefore allowing him or her the possibility of gains and profits.

The Starting Point:  Retirement Plans

A retirement plan, as its name implies, is an agreement between two entities (on the one hand an individual or a group of people, the other being a financial institution like a bank or credit union) to provide people with an income when they are retired and no longer earning a salary.

There are two basic types of retirement plans:  defined benefits or defined contribution plans.

Defined benefits plans have been around for some time; social security programs (which are administered by governments from ‘forced’ contributions from employers and employees) are examples of defined benefit plans.  The primary element of a defined benefits plan is the guaranteed payout after retirement; the amount of payout is computed based on a fixed formula.  For example, a plan may be computed on the basis of the last amount of salary an employee has been receiving multiplied by the number of years he or she has been working; then, the product is multiplied by a factor called the accrual rate.

Defined contribution plans such as IRAs and 401(k)s, are based on the contributions made by an individual into an account with a financial institution like a bank, broker, or mutual fund in which contributions may be invested in many types of securities such as stocks, bonds, money market funds, and CDs.  Returns on investment are credited to the individual’s account and the monies generated can be accessed upon retirement.

Individual Retirement Accounts or IRAs

As mentioned, the IRA is one form of a defined contribution plan.  It is unique because of the tax advantages incorporated to encourage savings.  IRAs and 401(k) plans have become increasingly popular in recent years, displacing the once-popular pension plans offered by employers as part of their hiring and benefits packages.

One of the reasons for IRA’s popularity is the fact that individual account holders can choose what to invest in, be it stocks, bonds, CDs, mutual funds or a combination to meet the account holders personal objectives. In effect, IRA grants individual users more responsibility in fiscal management instead of delegating the same to some faceless corporation or entity.

Legislation has also played a role by relaxing the restrictions on the types of investments into which IRAs may be invested.  Since IRAs also offer tax advantages, this makes the IRA even more attractive as a retirement savings option.

Roth IRAs

Roth IRAs are a form of the conventional IRA concept.  Under the law sponsored by Senator Roth, Roth IRAs can be invested in a wide variety of instruments, ranging from securities to derivatives, certificates of deposits and other, non-typical investment instruments.  As with conventional IRAs, Roth IRAs have detailed eligibility and filing requirements.  However, there are also differences between traditional and Roth IRAs, especially in terms of taxes and procedures.

International Funds

An international fund, also called foreign fund, is one that invests in countries outside of the United States.  This is of course, coming from the point of view of an American investor.

Global Funds

A global fund is one that invests all over the world, thus the term global.  Such funds have holdings in various markets all over the world: including that of the United States.  A global fund comes with the advantage of being able to capitalize and gain on progressive markets worldwide while being able to offset any losses incurred in some of the less stable countries.

Regional Funds

If you are not comfortable investing in a “come one, come all or come anyone” global fund that can have holdings in countries you are not entirely comfortable investing in (say, due to political instability, the possibility of civil war, extensive corruption, terrorism,  etc), you can opt for a regional fund instead.  A regional fund invests only in one specific geographic area, say only in the Asia-Pacific or in Europe.  This way, you limit your investment only in countries which you believe are progressive and less-risky to invest in.  Of course, if economic problems assail the entire region, your regional fund – and thus you – can suffer great losses.

Country Funds

Country funds are just like regional funds except of course, as the name suggests, it only invests in one specific country.  If you are a resident/citizen of the country you have chosen, then you can consider your investment a domestic investment.  If you choose a different country, then it is foreign and thus an international investment.

This type of funds gives you the advantage of being able to closely monitor where your money is going.  Instead of needing to keep track of global or regional market conditions, you need only focus on a single country’s market.  Of course, you would still need to incorporate global and regional conditions in your country fund investment decisions, but you’d now be looking for factors that can affect your investment indirectly rather than those that can have direct and immediate impact on your investment profits.

Global Sector Funds

Global Sector Funds are industry-specific global funds.  The funds’ holdings can be found anywhere in the world, but they pertain only one ‘sector’ or one industry, say only the real estate sector, or only the food manufacturing sector, or only the banking sector, etc.  The fund manager is given the freedom to invest money into practically anything as long as it is within the investor’s chosen sector.  At a time when even the most stable companies’ shares were valued way lower than that of business process outsourcing and call center companies, investing in a global fund in the BPO sector can be a brilliant move.

Top mutual funds are those that are not easily affected by ups and downs of the stock market, and are therefore, inelastic.  “Top” would mean the money invested will most probably multiply.

Picking Top Funds

Point 1: Stability and consistency are factors to consider.

Point 2: Pick one that has had a steady track record.  Deciding solely based on current fund standing is inappropriate.  Bear in mind, every fund has a down year or two.

Point 3: Consider the expenses.  Fund managers are entitled to fees, called “loads.”  These fees cover the administrative expenses as well as the commissions and sales charges.  No wonder, a lot of advertisements for “no-load” funds are out.  Be wary about such offers, though, for they may carry hidden charges.

Point 4:  Dig deeply. Find out how the fund delivered its impressive performance.  Shun the thought of picking funds that blatantly breaches their investment mandates, e.g. large-cap fund holding a predominantly mid-cap stock portfolio.

Avoid getting funds that bank on high-risk strategy or its bull-run.  Select the “all-season” performers.  You must therefore educate yourself on the difference between a bull and a bear market.  Volatility is the best predictor of how a fund will hold up in a bear market.

Check out sector funds as well as income funds.  Sector funds have potential for tremendous growth as they are commodities of stable demand, e.g. energy companies, transportation, electronics, communications, etc.  Income funds are those that don’t experience capital appreciation all the time but are not as likely to depreciate.  Stay away from the “here now, gone tomorrow” funds.

Point 5:  Check the ratings. “Rating Companies.” Morningstar is the most popular as it bases its ratings on performances over the last five or ten years.  But keep in mind past results don’t ensure future results.

Lipper Leader Fund Ratings, on the other hand, uses five criteria – consistent return, preservation, total return, tax efficiency, and expense.  The catch is that investors should be registered to get the classified information that they offer.

Schwab’s One Source Select List is another.  Ratings are presented in diagrams and tables.  However, they offer no explanation as to how they derive their data.

Magazines such as Business Week also provide rating information.

Let me ask now: Can you pick the best mutual fund?  Actually, there’s no yardstick to measure the best from the worst mutual fund.  What may be the best for one person may not be best for another.  Each has different concerns.  The best fund is actually the fund that suits one’s needs and wants.  The choice is yours and yours alone.  With careful research and diligence you will be able to pick the fund that best matches your needs.