Margin

With a margin account, you can borrow money from your brokerage account to purchase securities. The portion of
the purchase price that you must deposit is called margin and is your initial equity or value in your account. The loan
is secured by the securities you purchase. Buying on margin amounts to getting a loan. When you buy on margin,
you must repay both the amount you borrowed and interest, even if you lose money on your investment.
Margin may be a useful tool in your investment strategy, but purchasing securities on margin involves significant risk
and is not appropriate for everyone.
Margin Q&As
The following Q&As will address basic questions about the benefits and disadvantages of borrowing on margin. For
more detailed information, read our margin rates and Margin Risk Disclosure Statement.
You may also wish to view the Purchasing on Margin section of the FINRA's Investor Education web site and the
Margin information on the SEC's web site.
* To view these PDF files you will need Adobe Acrobat, which is available for downloading free of charge.
Q: What does it mean when I purchase securities on margin?
Q. What is a margin call?
Q: How do I know if a margin account is for me?
Q: What are the benefits of borrowing on margin?
Q: What are the risks involved with margin borrowing?
Q: How does margin borrowing work?
Q: Which securities are eligible as margin borrowing collateral?
Q: Which securities are not eligible?
Q: What does it mean when I purchase securities on margin?
A: A margin account allows you to increase your investment purchasing power by borrowing money. When you
borrow on margin, you use the marketable securities in your account as collateral for a loan.
Q. What is a margin call?
A. If the securities in your account decline in value, so will the value of the collateral supporting your loan. If the value
of your securities declines past a certain amount, we may issue a margin call to restore the value of your account.
Whether or not we issue a margin call, we have the right to liquidate securities in your account in order to meet our
equity requirements for customer margin accounts. We have the right to do this without contacting you first. If we do
issue a margin call, we may give you a limited time to satisfy the call. If the market is unusually volatile, the amount of
time you have to satisfy the call may be reduced from the amount of time we would normally allow.
Q: How do I know if a margin account is for me?
A: It is essential that you fully understand how a margin account works. Familiarize yourself with our margin policies
and practices as described on this page and in Margin Rates. You can also call one of our Individual Consultants at
1 800 927-3059 if you have additional questions or concerns.
Unless you are completely comfortable borrowing on margin, you should consider limiting your purchases
to a cash account that requires you to pay for the securities in full. Cash accounts are not subject to margin
calls.
Q: What are the benefits of borrowing on margin?
A: Margin borrowing gives you leverage by allowing you to purchase additional securities using your existing assets
as collateral for the loan. It allows you to respond to market changes and react quickly to new investment
opportunities that may arise. In addition, you may be protected against late payments for trades. If we do not receive
your payment for the purchase of securities, borrowing against the fully paid and marginable securities in your
account may cover payment. And, margin interest rates may be comparable to, or lower than, the prime interest rate,
the rate offered by banks to their best business customers. The actual interest rate charged will be determined by the
value of cash and securities in your account. Finally, using a margin account lets you borrow without a preset
repayment plan, unless there is a margin call. Interest on the outstanding balance is due and posted to your account
monthly.
Q: What are the risks involved with margin borrowing?
A: There are a number of risks that you need to consider in deciding to trade securities on margin. These include:

You may be forced to sell securities in your accounts to meet a margin call. If the equity in your
account falls below the maintenance margin requirements under the lawor higher "house" requirements (if
applicable), we can sell the securities in your accounts to cover the margin deficiency. You will also be
responsible for any shortfall in the accounts after such a sale.

Securities in your account can be sold without contacting you. Some investors mistakenly believe that
they must be contacted first for a margin call to be valid. This is not the case. We will attempt to notify our
customers of margin calls, but are not required to do so. Even if you're contacted and provided with a
specific date to meet a margin call, we may decide to sell some or all of your securities before that date
without any further notice to you. For example, we may take this action because the market value of your
securities has continued to decline in value.

You are not entitled to choose which securities or other assets in your accounts are sold. There is no
provision in the margin rules that gives you the right to control liquidation decisions. We may decide to sell
any of the securities that are collateral for your margin loan to protect our interests.

The "house" maintenance requirements can increase at any time and without advance notice. These
changes often take effect immediately and may cause a house call. If you don't satisfy this call, we may
liquidate or sell securities in your accounts.

You are not entitled to an extension of time on a margin call. While an extension of time to meet a
margin call may be

Bonds versus Bond Funds

Individual bonds and bond funds are two very different animals. Understanding how bond funds and
individual bonds differ will help you assess which is the best investment option for you. Here are four
factors you should consider:
1.
Return of Principal. Unless there is a default, when an individual bond matures or is called, your
principal is returned. That is not true with bond funds. Bond funds have no obligation to return your
principal. Except for UITs, they have no maturity date. With a bond fund, the value of your investment
fluctuates from day to day. While this is also true of individual bonds trading in the secondary market,
if the price of a bond declines below par, you always have the option of holding the bond until it
matures and collecting the principal.
2.

Income. With most fixed-rate individual bonds, you know exactly how much interest you'll
receive. With bond funds, the interest you receive can fluctuate with changes to the underlying bond
portfolio. Another consideration is that many bond funds pay interest monthly opposed to
semiannually, as is the case with most individual bonds.

3.

Diversification. With a single purchase, a bond fund provides you with instant diversification at a
very low cost. To put together a diversified portfolio of individual bonds, you'll need to purchase
several bonds, and that might cost you $50,000 or more. Most mutual funds only require a minimum
investment of a few thousand dollars.

4.

Liquidity. Virtually all bond funds can be sold easily at anytime at the current fund value (NAV).
The liquidity of individual bonds, on the other hand, can vary considerably depending on the bond. In
addition to taking longer to sell, illiquid bonds may also be more expensive to sell.

Comparing Bonds and Bond Funds

Individual Bonds

Bond Mutual

Closed-End Bond

Funds

Funds

Return of

Principal returned

Principal

at maturity or

back as bonds in

when bond is

UIT mature or are

called

called

Maturity Date

Set maturity date

Principal at risk

None

Principal at risk

Bond UITs

None

Receive principal

UIT liquidated on

Bond ETFs

Principal at risk

None

set date
Income

Usually fixed and

Fluctuating

Fluctuating monthly

Fixed monthly,

Fluctuating

Payments

paid semiannually

monthly

or quarterly

quarterly, or

monthly

(except zero-

payments

payments

semiannual

payments

coupon bonds)
Liquidity

payments

Trade on

Bought and sold

Trade on an

Bought and sold at

Trade on an

secondary market

at net asset

exchange with daily

NAV

exchange with

above or below

value

fluctuation in the

daily fluctuation in

unit price

the unit price

their face value,

but some bonds
can be hard to sell
Redeemable

Redeemable only

By selling shares

By selling shares at

By selling shares

By selling shares

at maturity or

at prevailing NAV

prevailing unit price

at NAV

at prevailing unit

when called
Default Risk

price

Varies by credit

Limited by

Limited by

Limited by

Limited by

quality of bond

diversification

diversification

diversification

diversification

Interest Rate

Exists but declines

Exists and

Because some

Exists and

Exists and

Risk

as bonds near

sensitivity to

closed-end funds

sensitivity to

sensitivity to

maturity

interest rates

are highly

interest rates

interest rates

depends on

leveraged, they can

depends on

depends on

portfolio of

be very sensitive to

portfolio of

portfolio of

holdings

interest rate

holdings

holdings

increases
Expenses

No ongoing

Annual fees; may

Annual fees and

Annual fees

Annual fees

expenses;

have front- or

brokerage

(usually lower than

(usually lower

transaction charge

back-end sales

built into price for

charge

commissions

purchases and

mutual fund fees)

than mutual fund

and front-end sales

fees) and

charge

brokerage

sales
Reinvestment

commissions

No automatic

Automatic

Automatic

Automatic

Automatic

reinvestment

reinvestment

reinvestment option

reinvestment

reinvestment

option

option

option

option available
for most but not
all ETFs

Professionally

No management

Managed

Actively

Actively managed

managed (except

Passively

Most are

managed

passively

index funds)

managed; some
are now actively
managed

Diversification

Need to purchase

Constantly

Constantly

Fixed portfolio of

Constantly

multiple bonds to

changing

changing portfolio

bonds; less

changing portfolio

diversify

portfolio of bonds

of bonds

diversified than

of

many bond mutual

funds, closed-end
funds or ETFs

Bond Basics

What's a Bond?
Bond Fact

A bond is a loan that an investor makes to a corporation,

government, federal agency or other organization.
Consequently, bonds are sometimes referred to as debt
securities. Since bond issuers know you aren't going to lend
your hard-earned money without compensation, the issuer of
the bond (the borrower) enters into a legal agreement to pay
you (the bondholder) interest.

Investors held nearly $2.4 trillion in

taxable and municipal bond funds
as of May 2010.
Source: Investment Company
Institute

The bond issuer also agrees to repay you the original sum loaned at the bond's maturity date, though
certain conditions, such as a bond being called, may cause repayment to be made earlier. The vast
majority of bonds have a set maturity datea specific date when the bond must be paid back at its face
value, called par value. Bonds are called fixed-income securities because many pay you interest based
on a regular, predetermined interest ratealso called a coupon ratethat is set when the bond is
issued.
Understanding bond basics is critical to making informed investment decisions about this investment
category. The more you know now, the less likely you will be to make a decision you later regret.

Bond Maturity

A bond's term, or years to maturity, is usually set when it is issued. Bond maturities can range from one
day to 100 years, but the majority of bond maturities range from one to 30 years. Bonds are often
referred to as being short-, medium- or long-term. Generally, a bond that matures in one to three years is
referred to as a short-term bond. Medium- or intermediate-term bonds are generally those that
mature in four to 10 years, and long-term bonds are those with maturities greater than 10 years. The
borrower fulfills its debt obligation typically when the bond reaches its maturity date, and the final interest
payment and the original sum you loaned (the principal) are paid to you.
Callable Bonds
Not all bonds reach maturity, even if you want them to. Callable bonds are common. They allow the
issuer to retire a bond before it matures. Call provisions are outlined in the bond's prospectus (or offering
statement or circular) and the indentureboth are documents that explain a bond's terms and conditions.
While firms are not formally required to document all call provision terms on the customer's confirmation
statement, many do so. (When you buy municipal securities, firms are required to provide more call
information on the customer confirmation than you will see for other types of debt securities.)
You usually receive some call protection for a period of the bond's life (for example, the first three years
after the bond is issued). This means that the bond cannot be called before a specified date. After that,
the bond's issuer can redeem that bond on the predetermined call date, or a bond may be continuously
callable, meaning the issuer may redeem the bond at the specified price at any time during the call
period. Before you buy a bond, always check to see if the bond has a call provision, and consider how
that might impact your portfolio investment strategy.
For information on the risks associated with callable bonds, go to the section on Call Risk

Bond Coupons

You may remember clipping bond coupons and mailing them in to receive an interest payment. Electronic
bookkeeping replaced coupon clipping two decades ago, but the term coupon is still an important part of
the bond investor's vocabulary. A bond's coupon is the annual interest rate paid on the issuer's borrowed
money, generally paid out semiannually. The coupon is always tied to a bond's face or par value, and is
quoted as a percentage of par. For instance, a bond with a par value of $1,000 and an annual interest
rate of 4.5 percent has a coupon rate of 4.5 percent ($45).
Coupon Choices
Say you invest $5,000 in a six-year bond paying 5 percent per year, semiannually. Assuming you hold the
bond to maturity, you will receive 12 interest payments of $125 each, or a total of $1,500. This coupon
payment is simple interest.
You can do two things with that simple interestspend it or reinvest it. Many bond investors rely on a
bond's coupon payments as a source of income, spending the simple interest they receive.
When you reinvest a coupon, however, you allow the interest to earn interest. The precise term is
"interest-on-interest," though we know it by another word: compounding. Assuming you reinvest the
interest at the same 5 percent rate and add this to the $1,500 you made, you would earn a cumulative
total of $1,724, or an extra $224. Of course, if the interest rate at which you reinvest your coupons is
higher or lower, your total return will be more or less. Also be aware that taxes can reduce your total
return. To learn more about the impact of taxes, read our Bonds and Taxes section.
The Power of Compounding
Regardless of the type of investment you select, saving regularly and reinvesting your interest income
can turn even modest amounts of money into sizable investments through the remarkable power of
compounding. If you save $200 a month and receive a 5 percent annual rate of return, you will have
more than $82,000 in 20 years' time.

Accrued Interest

Accrued interest is the interest that adds up (accrues) each day between coupon payments. If you sell a
bond before it matures or buy a bond in the secondary market, you most likely will catch the bond
between coupon payment dates. If you're selling, you're entitled to the price of the bond, plus the
accrued interest that the bond has earned up to the sale date. The buyer compensates you for this
portion of the coupon interest, which is generally handled by adding the amount to the contract price of
the bond.
Use our Accrued Interest Calculator to figure out a bond's accrued interest.

Zero-Coupon Bonds
Bonds that don't make regular interest payments are called zero-coupon bondszeros for short. As the
name suggests, these are bonds that pay no coupon or interest payment. Instead of getting an interest
payment, you buy the bond at a discount from the face value of the bond, and you are paid the face
amount when the bond matures. For example, you might pay $3,500 to purchase a 20-year zero-coupon
bond with a face value of $10,000.
Federal agencies, municipalities, financial institutions and corporations issue zeros. One of the most
popular zeros goes by the name of STRIPS (Separate Trading of Registered Interest and Principal
Securities). A financial institution, government securities broker or government securities dealer can
convert an eligible Treasury security into a STRIP bond. As the name implies, the interest is stripped from
the bond. A nice feature of STRIPS is that they are non-callable, meaning they can't be called to be
redeemed should interest rates fall. This feature offers protection from the risk that you will have to settle
for a lower rate of return if your bond is called, you receive cash, and you need to reinvest it, also known
as reinvestment risk. For more information, see the STRIPS section.
CautionInterest Is NOT Invisible to the IRS
The difference between the discounted amount you pay for a zero-coupon bond and the face amount you
later receive is the imputed interest. This is interest that the IRS considers to have been paid, even if you
haven't actually received it. While interest on zeros is paid out all at once, the IRS demands that you pay
tax on this "phantom" income each year, just as you would pay tax on interest you received from a
coupon bond. Some investors avoid paying the imputed tax by buying municipal zero-coupon bonds (if
they live in the state where the bond was issued) or purchasing the few corporate zero-coupon bonds
that have tax-exempt status.
Floating-Rate Bonds
While the majority of bonds are fixed-rate bonds, a category of bonds called floating-rate bonds (floaters)
have a coupon rate that is adjusted periodically, or "floats," using an external value or measure, such as
a bond index or foreign exchange rate.
Floaters offer protection against interest rate risk, because the fluctuating interest coupon tends to help
the bond maintain its current market value as interest rates change. However, their coupon rate is usually

lower than that of fixed-rate bonds. Because a floating bond's rate increases as interest rates go up, they
tend to find favor with investors during periods when economic forces are causing interest rates to rise.
Most floater coupon rates are generally reset more than once a year at predetermined intervals (for
example, quarterly or semiannually). Floaters are slightly different from so-called variable rate or
adjustable rate bonds, which tend to reset their coupon rate less frequently. (Note: Floating and
adjustable-rate bonds may have restrictions on the maximum and minimum coupon reset rates.)

Bond Prices

Bonds are generally issued in multiples of $1,000, also known as a bond's face or par value. But a bond's
price is subject to market forces and often fluctuates above or below par. If you sell a bond before it
matures, you may not receive the full principal amount of the bond and will not receive any remaining
interest payments. This is because a bond's price is not based on the par value of the bond. Instead, the
bond's price is established in the secondary market and fluctuates. As a result, the price may be more or
less than the amount of principal and the remaining interest the issuer would be required to pay you if
you held the bond to maturity.
The price of a bond can be above or below its par value for many reasons, including interest rate
adjustments, whether a bond credit rating has changed, supply and demand, a change in the
creditworthiness of a bond's issuer, whether the bond has been called or is likely to be (or not to be)
called, a change in the prevailing market interest rates, and a host of other factors. If a bond trades
above par, it is said to trade at a premium. If a bond trades below par, it is said to trade at a discount. For
example, if the bond you desire to purchase has a fixed interest rate of 8 percent, and similar-quality new
bonds available for sale have a fixed interest rate of 5 percent, you will likely pay more than the par
amount of the bond that you intend to purchase, because you will receive more interest income than the
current interest rate (5 percent) being attached to similar bonds.

Bond Yield

Yield is a general term that relates to the return on the capital you invest in the bond.
Smart Move
When someone tells you a bond's yield is 7 percent, ask: "What definition of yield are you using?"

You hear the word "yield" a lot with respect to bond investing. There are, in fact, a number of types of
yield. The terms are important to understand because they are used to compare one bond with another
to find out which is the better investment.

There are several definitions that are important to understand: coupon yield, current yield, yield-tomaturity, yield-to-call and yield-to-worst.

Let's start with the basic yield concepts.

Coupon yield is the annual interest rate established when the bond is issued. It's the same as
the coupon rate and is the amount of income you collect on a bond, expressed as a percentage of
your original investment. If you buy a bond for $1,000 and receive $45 in annual interest payments,
your coupon yield is 4.5 percent. This amount is figured as a percentage of the bond's par value and
will not change during the lifespan of the bond.

Current yield is the bond's coupon yield divided by its market price. Here's the math on a bond
with a coupon yield of 4.5 percent trading at 103 ($1,030).

Say you check the bond's price later, and it's trading at 101 ($1,010). The current yield has changed:

If you buy a new bond at par and hold it to maturity, your current yield when the bond matures will be the
same as the coupon yield.

Yields That Matter More

Bond Fact
Coupon and current yield only take you so far down the path
of estimating the return your bond will deliver. For one, they
Price and yield are inversely
don't measure the value of reinvested interest. They also
related: As the price of a bond
aren't much help if your bond is called earlyor if you want to
goes up, its yield goes down, and
evaluate the lowest yield you can receive from your bond. In
vice versa.
these cases, you need to do some more advanced yield
calculations. Fortunately, there is a spate of financial
calculators availablesome that even estimate yield on a
before- and after-tax basis. The following yields are worth knowing, and should be at your broker's
fingertips:

Yield-to-Maturity (YTM) is the rate of return you receive if you hold the bond to maturity and
reinvest all the interest payments at the yield-to-maturity rate. It is calculated by taking into account the
total amount of interest you will receive over time, your purchase price (the amount of capital you

invested), the face amount (or amount you will be paid when the issuer redeems the bond), the time
between interest payments and the time remaining until the bond matures.

Yield-to-Call (YTC) is figured the same way as YTM, except instead of plugging in the number of
months until a bond matures, you use a call date and the bond's call price. This calculation takes into
account the impact on a bond's yield if it is called prior to maturity and should be performed using the
first date on which the issuer could call the bond.

Yield-to-Worst (YTW) is whichever of a bond's YTM and YTC is lower. If you want to know the
most conservative potential return a bond can give youand you should know it for every callable
securitythen perform this comparison.

To get a more accurate picture of what a bond will cost you or what you received for it, you should also
confirm that your broker has calculated the yield, adjusting the purchase price up (when you purchase) or
down (when you sell) by the amount of the mark-up or commission (when you purchase) or mark-down
or commission (when you sell) and other fees or charges that you are charged by your broker for its
services. This is called yield reflecting broker compensation.

Three Assumptions
YTM and YTC are based on the following assumptions:
1.
You hold your bond to maturity or call date.
2.
You reinvest every coupon.
3.
All coupons are reinvested at the YTM or YTC, whichever is applicable.
Interest rates regularly fluctuate, making each reinvestment at the same rate virtually impossible. Thus,
YTM and YTC are estimates only, and should be treated as such. While helpful, it's important to realize
that YTM and YTC may not be the same as a bond's total return. Such a figure is only accurately
computed when you sell a bond or when it matures.

Bond Yield

Reading a Yield Curve

You've probably seen financial commentators talk about the Treasury Yield Curve when discussing bonds
and interest rates. It's a handy tool because it provides, in one simple graph, the key Treasury bond data
points for a given trading day, with interest rates running up the vertical axis and maturity running along
the horizontal axis.

A typical yield curve is upward sloping, meaning that securities with longer holding periods carry higher
yield.

In the yield curve above, interest rates (and also the yield) increase as the maturity or holding period
increasesyield on a 30-day T-bill is 2.55 percent, compared to 4.80 percent for a 20-year Treasury
bondbut not by much. When an upward-sloping yield curve is relatively flat, it means the difference
between an investor's return from a short-term bond and the return from a long-term bond is minimal.
Investors would want to weigh the risk of holding a bond for a long period (see Interest Rate Risk) versus
the only moderately higher interest rate increase they would receive compared to a shorter-term bond.
Indeed, yield curves can be flatter or steeper depending on economic conditions and what the Federal
Reserve Board is doing, or what investors expect the Fed to do, with the money supply. A flattened
positive yield curve means there's little difference between short-term and long-term interest rates.
Sometimes economic conditions and expectations create a yield curve with different characteristics. For
instance, an inverted yield curve slopes downward instead of up. When this happens, short-term bonds
pay more than long-term bonds. Yield curve watchers generally read this as a sign that interest rates
may decline.
The Department of Treasury provides daily Treasury Yield Curve rates, which can be used to plot the
yield curve for that day.

Figuring Return

Bond Fact
If you've held a bond over a long period of time, you might
want to calculate its annual percent return, or the percent
return divided by the number of years you've held the
investment. For instance, a $1,000 bond held over three
years with a $145 return has a 14.5 percent return, but a 4.83
percent annual return.

Nobody can give you a bond's

actual total return ahead of time. It
can only be figured after the bond
has matured or is sold.

When you calculate your return, you should account for annual inflation. Calculating your real rate of
return will give you an idea of the buying power your earnings will have in a given year. You can
determine real return by subtracting the inflation rate from your percent return. As an example, an
investment with 10 percent return during a year of 3 percent inflation is usually said to have a real return
of 7 percent.
To figure total return, start with the value of the bond at maturity (or when you sold it) and add all of your
coupon earnings and compounded interest. Subtract from this figure any taxes and any fees or
commissions. Then subtract from this amount your original investment amount. This will give you the
total amount of your total gain or loss on your bond investment. To figure the return as a percent, divide
by the beginning value of your investment and multiply by 100:

Bonds and Interest Rates

Three Cardinal Rules

1.
When interest rates risebond prices fall.
2.
When interest rates fallbond prices rise.
3.
Every bond carries interest rate risk.
Learn more about interest rate risk and other risks that come with investing in bonds
and bond mutual funds.

Interest rate changes are among the most significant factors affecting bond return.

To find out why, we need to start with the bond's coupon. This is the interest the bond pays out. How
does that original coupon rate get established? One of the key determinants is the federal funds rate,
which is the prevailing interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Federal Reserve (or "the Fed") sets a target for the
federal funds rate and maintains that target interest rate by buying and selling U.S. Treasury securities.
When the Fed buys securities, bank reserves rise, and the federal funds rate tends to fall. When the Fed
sells securities, bank reserves fall, and the federal funds rate tends to rise. While the Fed doesn't directly
control this rate, it effectively controls it through the buying and selling of securities. The federal funds
rate, in turn, influences interest rates throughout the country, including bond coupon rates.
Another rate that heavily influences a bond's coupon is the Federal Reserve Discount Rate, which is the
rate at which member banks may borrow short-term funds from a Federal Reserve Bank. The Federal
Reserve Board directly controls this rate. Say the Federal Reserve Board raises the discount rate by
one-half of a percent. The next time the U.S. Treasury holds an auction for new Treasury bonds, it will
quite likely price its securities to reflect the higher interest rate.
What happens to the Treasury bonds you bought a couple of months ago at the lower interest rate?
They're not as attractive. If you want to sell them, you'll need to discount their price to a level that equals
the coupon of all the new bonds just issued at the higher rate. In short, you'd have to sell your bonds at a
discount.
It works the other way, too. Say you bought a $1,000 bond with a 6 percent coupon a few years ago and
decided to sell it three years later to pay for a trip to visit your ailing grandfather, except now, interest
rates are at 4 percent. This bond is now quite attractive compared to other bonds out there, and you
would be able to sell it at a premium

Basis Point Basics

You often hear the term basis pointsbps for shortin connection with bonds and interest rates. A basis
point is one one-hundredth of a percentage point (.01). One percent = 100 basis points. One half of 1
percent = 50 basis points. Bond traders and brokers regularly use basis points to state concise
differences in bond yields. The Federal Reserve Board likes to use bps when referring to changes in the
federal funds rate.
Pop Quiz
Question: The Federal Reserve Open Market Committee announced it would raise the discount rate by
25 basis points. How much did the Fed raise interest rates?
A. 2.5 percent

B. One-quarter of a percent
C. 25 percent
Check Your Answer

Where to Find Economic Indicators

Smart bond investors pay close attention to key or "leading" economic indicators, primarily watching for
any potential impact they may have on inflation and, because there is a close correlation, interest rates.
Various branches of the federal government keep tabs on many, but not all, of these leading indicators.
Here are a few useful online resources:
U.S. Census Bureau's Economic Briefing Room and Economic Calendar
U.S. Department of Labor, Bureau of Labor Statistics
The Conference Board's Economic Indicators
The Federal Reserve Board's calendar of Federal Open Market Committee (FOMC) meetings. The
FOMC sets certain interest rates that are used by others in the bond market to determine all other
interest rates.

Interest Rate Risk

Remember the cardinal rule of bonds: When interest rates fall, bond prices rise, and when interest rates
rise, bond prices fall. Interest rate risk is the risk that changes in interest rates in the U.S. or the world
may reduce (or increase) the market value of a bond you hold. Interest rate riskalso referred to as
market riskincreases the longer you hold a bond.
Let's look at the risks inherent in rising interest rates.
If you bought a 10-year, $1,000 bond today at a coupon rate of 4 percent, and interest rates rise to 6
percent, two things can happen.
Say you need to sell your 4 percent bond prior to maturity. In doing so, you must compete with newer
bonds carrying higher coupon rates. These higher coupon rate bonds decrease the appetite for older
bonds that pay lower interest. This decreased demand depresses the price of older bonds in the
secondary market, which would translate into you receiving a lower price for your bond if you need to sell

it. In fact, you may have to sell your bond for less than you paid for it. For this reason, interest rate risk is
also referred to as market risk.
Rising interest rates also make new bonds more attractive (because they earn a higher coupon rate).
This results in what's known as opportunity riskthe risk that a better opportunity will come around that
you may be unable to act upon. The longer the term of your bond, the greater the chance that a more
attractive investment opportunity will become available, or that any number of other factors may occur
that negatively impact your investment. This also is referred to as holding period riskthe risk that not
only a better opportunity might be missed, but that something may happen during the time you hold a
bond to negatively affect your investment.
Bond fund managers face the same risks as individual bondholders. When interest rates riseespecially
when they go up sharply in a short period of timethe value of the fund's existing bonds drops, which
can put a drag on overall fund performance.
Since bond prices go up when interest rates go down, you might ask what risk, if any, do you face when
rates fall? The answer is call risk.

Call Risk
Take Cover (from Calls)
As discussed earlier, bonds with a call provision may be
redeemed or called by the issuer, requiring you to redeem the
bonds at their face value well before their maturity dates.
Similar to when a homeowner seeks to refinance a mortgage
at a lower rate to save money when loan rates decline, a
bond issuer often calls a bond when interest rates drop,
allowing the issuer to sell new bonds paying lower interest
ratesthus saving the issuer money. For this reason, a bond
is often called following interest rate declines. The bond's
principal is repaid early, but the investor is left unable to find
a similar bond with as attractive a yield. This is known as call risk.

Non-callable bonds are called

bullet securities"bullets" for
short. Why the funny name?
Because they take aim at the
maturity dateand once fired
(issued), they don't stop (get
called) until that maturity date is
hit.

With a callable bond, you might not receive the bond's original coupon rate for the entire term of the
bond, and it might be difficult or impossible to find an equivalent investment paying rates as high as the
original rate. This is known as reinvestment risk. Additionally, once the call date has been reached, the
stream of a callable bond's interest payments is uncertain, and any appreciation in the market value of
the bond may not rise above the call price.
Smart Move

To protect against unwelcome calls, always study the call provisions and any published call schedules
thoroughly before buying a bond. Ask your broker for complete call information. Remember that bonds
are generally called during periods of declining interest rates, so it pays to be particularly mindful of a
bond's potential to be called during such times.

Refunding Risk and Sinking Funds Provisions

A sinking fund provision, which often is a feature included in bonds issued by industrial and utility
companies, requires a bond issuer to retire a certain number of bonds periodically. This can be
accomplished in a variety of ways, including through purchases in the secondary market or forced
purchases directly from bondholders at a predetermined price, referred to as refunding risk.
Holders of bonds subject to sinking funds should understand that they risk having their bonds retired
prior to maturity, which raises reinvestment risk. Unlike other bonds subject to call provisions, depending
upon the sinking fund provision, there may be a relatively high likelihood that the bondholders will be
forced to redeem their bonds prior to maturity, even if market-wide interest rates remain unchanged.
It is important to understand that there is no guarantee that an issuer of these bonds will be able to
comply strictly with any redemption requirements. In certain cases, an issuer may need to borrow funds
or issue additional debt to refinance an outstanding bond issue subject to a sinking fund provision when it
matures.

Default and Credit Risk

If you have ever loaned money to someone, chances are

you gave some thought to the likelihood of being repaid.
Some loans are riskier than others. The same is true
when you invest in bonds. You are taking a risk that the
issuer's promise to repay principal and pay interest on the
agreed upon dates and terms will be upheld. U.S.
Treasury securities (for example, a Treasury bond, bill or
note) and other bonds backed by the "full faith and credit
of the U.S. government," are generally deemed to be riskfree. However, most bonds face a possibility of default.
This means that the bond obligor will either be late paying
creditors (including you, as a bondholder), pay a
negotiated reduced amount or, in worst-case scenarios,
be unable to pay at all.

Ratings Rise for Munis

A number of ratings agencies
have indicated they plan to
move to a uniform ratings scale
for all bonds. In the past, most
ratings agencies have used a
separate, and more stringent,
set of standards for rating
municipal bonds than corporate
bonds. As ratings agencies
employ this uniform standard,
investors can expect to see a
rise in the ratings of thousands
of municipal bonds. Investors
should not take this to mean
these bonds have been
deemed to carry reduced credit
risk. Rather, the improved
rating reflects a method of
evaluating risk that is in
keeping with the calibration
used for corporate bonds.

Ratings are a way of assessing default and credit risk.

The Securities and Exchange Commission (SEC) has
designated 10 rating agencies as Nationally Recognized
Statistical Rating Organizations (NRSROs). They are AM
Best; DBRS Ltd.; Egan-Jones Rating Company; Fitch
Ratings (Fitch); Japan Credit Rating Agency, Ltd.; LACE
Financial Corp.; Moody's Investors Service (Moody's);
Rating and Investment Information, Inc. (R&I); Realpoint
LLC, which focuses on commercial mortgage-backed
securities; and Standard & Poor's (S&P). These
organizations review information about selected issuers,
especially financial information, such as the issuer's financial statements, and assign a rating to
an issuer's bondsfrom AAA (or Aaa) to D (or no rating).
Each NRSRO uses its own ratings definitions and employs its own criteria for rating a given
security. It is entirely possible for the same bond to receive a rating that differs, sometimes
substantially, from one ratings agency to the next. While it is a good idea to compare a bond's
rating across the various NRSROs, not all bonds are rated by every agency, and some bonds are
not rated at all.
Not Perfect
Rating agencies don't always get it right. Enron was rated investment grade by the NRSROs just
days before bankruptcy, and WorldCom was rated investment grade only three months before
filing for bankruptcy. More recently, the collapse of the subprime mortgage market uncovered
weaknesses in the ratings of many residential mortgage-backed securities that were linked to
subprime mortgages.

Risk from A to D

The credit quality of bonds is based primarily on the likelihood of possible default, resulting in investors
losing their principal. Rating agencies sift through data provided by the bond issuers, and other public
and non-public data, to evaluate the likelihood of default for a bond assigned with a particular rating,
while also applying other risk factors in assigning a specific rating. The chart below describes common
bond ratings and includes a general description of each 1. For precise ratings descriptions, visit the
respective ratings agency websites.
Rating Description

Rating by Rating
Organization

INVESTMENT GRADE

Highest credit quality with minimal risk of default. Extremely strong

capacity to meet financial commitments.

AM Best: aaa
DBRS, Egan-Jones,
Fitch, Japan, R&I,
Realpoint, S&P: AAA
LACE: A+, A
Moody's: Aaa

Superior to very high credit quality and very low risk of default. Very
strong capacity to meet financial commitments.

AM Best: aa
DBRS, Egan-Jones,
Fitch, Japan, R&I,
Realpoint, S&P: AA
LACE: B+
Moody's: Aa

High to upper-medium credit quality with some risk factors that could
contribute to default. Bonds in this category are still considered to be in
little danger of default risk.

AM Best: a
DBRS, Egan-Jones,
Fitch, Japan, Moody's,
R&I, Realpoint, S&P: A
LACE: B

Adequate to medium credit quality, with acceptable levels of risk. Could

be susceptible to default risk in the long term, or there may be other
adverse conditions present which reduce credit quality.

AM Best: bbb
DBRS, Egan-Jones,
Fitch, Japan, R&I,
Realpoint, S&P: BBB
LACE: B, C+
Moody's: Baa

NON-INVESTMENT GRADE
Questionable to speculative financial security, with additional factors that
may contribute to default, such as ability to meet debt obligations,
especially during periods of economic recession.

AM Best: bb
DBRS, Egan-Jones,
Fitch, Japan, R&I,

Realpoint, S&P: BB
LACE: C, C
Moody's: Ba

Speculative to highly speculative financial security, with low expectation

that issuer will meet debt obligations.

AM Best: b
DBRS, Egan-Jones,
Fitch, Japan, Moody's,
R&I, Realpoint, S&P: B
LACE: C, C

Very highly speculative with high risk of default.

AM Best: ccc
DBRS, Egan-Jones,
Fitch, Japan, R&I,
Realpoint, S&P: CCC
LACE: D, E
Moody's: Caa

Very highly speculative with danger of default, or default probable, or may

have recently occurred.

AM Best: cc
DBRS, Egan-Jones,
Fitch, Japan, R&I,
Realpoint, S&P: CC
LACE: D, E
Moody's: Ca

Very highly speculative, often accompanied by bankruptcy petitions;

default imminent or has recently occurred.

AM Best: c
DBRS, Japan, Moody's,
R&I, Realpoint: C
Fitch: C+, C, C
LACE: D, E
S&P, Egan-Jones: C+,
C, C

Default and/or in arrears, meaning a portion of a serial bond remains

unpaid at maturity. Issuer has not met scheduled payment of interest or
principal or made clear it will miss such payments.

AM Best: d
DBRS, Egan-Jones,
Fitch, Japan, Realpoint,
S&P: D
LACE: D, E
Moody's, R&I: No Rating

The specific ratings are copyrighted by the individual rating agencies and may not be used or reprinted
without a license and/or written permission.

Slow Down When You See "High Yield"

Junk Bonds

Generally, bonds are lumped into two broad categoriesinvestment grade and non-investment grade.
Bonds that are rated BBB, bbb, Baa or higher are generally considered investment grade. Bonds that are
rated BB, bb, Ba or lower are non-investment grade. Non-investment grade bonds are also referred to as
high yield or junk bonds. Junk bonds are considered riskier investments because the issuer's general
financial condition is less sound. This means the entity issuing the bonda corporation, for instance
may not be able to pay the interest and principal to bondholders when they are due.
Junk bonds typically offer a higher yield than investment-grade bonds, but the higher yield comes with
increased riskspecifically, the risk that the bond's issuer may default
Many investors heavily weigh the rating of a particular bond in determining if it is an appropriate and
suitable investment. Although credit ratings are an important indicator of creditworthiness, you should
also consider that the value of the bond might change depending upon changes in the company's
business and profitability. Some credit rating agencies issue outlooks and other statements to warn you if
they are considering upgrading or downgrading a credit rating. In the worst scenario, holders of bonds
could suffer significant losses, including the loss of their entire investment. Finally, some bonds are not
rated. In such cases, you may find it difficult to assess the overall creditworthiness of the issuer of the
bond.
Don't Reach
Do not make your investment decision based solely on a bond's yield. This is referred to as "reaching for
yield," and is one of the most common mistakes bond investors make. It is especially common during
periods when interest rates are low and/or stock market performance is lackluster. The high return on the
bond you are "reaching for" is usually an indicator of increased investor risk. Rather, take a more
comprehensive look at your investment. In addition to looking beyond yield to such things as a bond's
credit rating, liquidity and the creditworthiness of the issuer, evaluate your tolerance for risk, when you
will need the money and how you plan to use the money you are investing.
Distressed Debt
Believe it or not, there is a market for distressed and even defaulted debt. This is a playing field for
sophisticated bond investors who are seekingoften through painstaking research, or with the intent to
assume increased investment riskto find a few diamonds in this very rough environment characterized
by bankruptcies and steep debt downgrades.

Inflation and Liquidity Risk

Inflation Risk

This is the risk that the yield on a bond will not keep pace with purchasing power (in fact, another name
for inflation risk is purchasing power risk). For instance, if you buy a five-year bond in which you can
realize a coupon rate of 5 percent, but the rate of inflation is 8 percent, the purchasing power of your
bond interest has declined. All bonds but those that adjust for inflation, such as TIPS, expose you to
some degree of inflation risk.
Liquidity Risk
Some bonds, like U.S. Treasury securities, are quite easy to sell because there are many people
interested in buying and selling such securities at any given time. These securities are liquid. Others
trade much less frequently. Some even turn out to be "no bid" bonds, with no buying interest at all. These
securities are illiquid.
Liquidity risk is the risk that you will not be easily able to find a buyer for a bond you need to sell. A sign
of liquidity, or lack of it, is the general level of trading activity: A bond that is traded frequently in a given
trading day is considerably more liquid than one which only shows trading activity a few times a week.
Investors can check corporate bond trading activityand thus liquidityby using FINRA's Market Data
Center. For insight into municipal bond liquidity, investors can use trade data found on the Municipal
Securities Rulemaking Board's website.
If you think you might need to sell the bonds you are purchasing prior to their maturity, you should
carefully consider liquidity risk, and what steps your broker will take to assist you when liquidating your
investment at a fair price that is reasonably related to then-current market prices. It is possible that you
may be able to re-sell a bond only at a heavy discount to the price you paid (loss of some principal) or
not at all.

Event Risk

In the 1980s, buyouts, takeovers and corporate restructurings became prevalent. With such upheavals
often came swift, and very often negative, changes to a company's credit rating. To this day, mergers,
acquisitions, leveraged buyouts and major corporate restructurings are all events that put corporate
bonds at risk, thus the name event risk.
Other events can also trigger changes in a company's financial health and prospects, which may trigger
a change in a bond's rating. These include a federal investigation of possible wrongdoing, the sudden
death of a company's chief executive officer or other key manager, or a product recall. Energy prices,
foreign investor demand and world events also are triggers for event risk. Event risk is extremely hard to
anticipate and may have a dramatic and negative impact on bondholders.

U.S. Treasury Securities

Once you've decided to invest in bonds, the next question iswhich type of bond? Bonds tend to be
broadly categorized according to who is issuing them.
U.S. Treasury Securities
U.S. Treasury securities ("Treasuries") are issued by the federal government and are considered to be
among the safest investments you can make, because all Treasury securities are backed by the "full faith
and credit" of the U.S. government. This means that come what mayrecession, inflation, warthe U.S.
government is going to take care of its bondholders.
Treasuries are also liquid. A group of nearly 20 primary dealers are required to buy large quantities of
Treasuries every time there is an auction and stand ready to trade them in the secondary market.
There are other features of Treasuries that are appealing to the individual investor. They can be bought in
denominations of $100, making them affordable, and the buying process is quite convenient. You can
either buy Treasuries through brokerage firms and banks, or you can simply follow the instructions on the
TreasuryDirect website. For more information, see the Buying and Selling Treasuries and Savings Bonds
section.
As an added bonus, while you must pay federal income taxes on the interest paid to you from Treasuries
held outside of a tax-deferred retirement account, you won't have to pay state income taxes on the
interest you received.

U.S. Treasury Securities

Once you've decided to invest in bonds, the next question iswhich type of bond? Bonds tend to be
broadly categorized according to who is issuing them.
U.S. Treasury Securities
U.S. Treasury securities ("Treasuries") are issued by the federal government and are considered to be
among the safest investments you can make, because all Treasury securities are backed by the "full faith
and credit" of the U.S. government. This means that come what mayrecession, inflation, warthe U.S.
government is going to take care of its bondholders.

Treasuries are also liquid. A group of nearly 20 primary dealers are required to buy large quantities of
Treasuries every time there is an auction and stand ready to trade them in the secondary market.
There are other features of Treasuries that are appealing to the individual investor. They can be bought in
denominations of $100, making them affordable, and the buying process is quite convenient. You can
either buy Treasuries through brokerage firms and banks, or you can simply follow the instructions on the
TreasuryDirect website. For more information, see the Buying and Selling Treasuries and Savings Bonds
section.
As an added bonus, while you must pay federal income taxes on the interest paid to you from Treasuries
held outside of a tax-deferred retirement account, you won't have to pay state income taxes on the
interest you received.

Treasury Bills, Notes and Bonds

Treasuries Defined
Treasury Bills

Short-term securities that are non-interest bearing (zero-coupon) with maturities of

only a few days (these are referred to as cash management bills), four weeks, 13
weeks, 26 weeks or 52 weeks. Also called T-bills, you buy them at a discount to
face value (par) and are paid the face value when they mature. Interest income is
subject to federal income tax, but exempt from state and local income taxes.

Treasury Notes

Fixed-principal securities issued with maturities of two, three, five, seven and 10
years. Sometimes called T-Notes, interest is paid semiannually, with the principal
paid when the note matures. Interest income is subject to federal income tax, but
exempt from state and local income taxes.

Treasury Bonds

Long-term, fixed-principal securities issued with a 30-year maturity. The Treasury

Department stopped issuing Treasury bonds in October 2001, but brought back
the 30-year bond in February 2006. Outstanding fixed-principal bonds have terms
from 10 to 30 years. Interest is paid on a semiannual basis with the principal paid
when the bond matures. Interest income is subject to federal income tax, but
exempt from state and local income taxes.

You can learn more about Treasuries on the TreasuryDirect website.

As safe as an investment in legitimate Treasury securities is, even the Treasury bond market has its
share of scams. The Bureau of the Public Debt alerts investors to fraudulent schemes through a website
called Frauds, Phonies, and Scams.

Treasuries Risk Report Card

No call risk and virtually no liquidity, event or credit and default risk.
Interest rate risk: If interest rates rise, the value of your bond on the secondary
market will likely fall.
Inflation risk: Treasury security yields may not keep up with inflation.
Opportunity risk: The longer the term of your U.S. Treasury security, the greater the
chance you will not be able to act upon a more attractive investment opportunity
should one become available.

Treasuries Snapshot

TIPS

Issuer

U.S. Treasury

Minimum Investment

$100

Interest Payment

Treasury bills are non-interest bearing: Sold at discount

from face value and pay interest upon maturity. Treasury
notes and bonds pay semiannual interest.

How to Buy/Sell

At original issue through TreasuryDirect or broker. On the

secondary market through a broker.

Bond Interest Rate

Determined at auction. Look up at Bureau of the Public

Debt or through a broker.

Price Information

TreasuryDirect for original issues. Broker, newspapers and

data vendors for secondary trade data.

Website for More Info

www.treasurydirect.gov

If you are concerned about inflation, the U.S. Treasury Department has some bonds that might interest
you. They're called Treasury Inflation Protected Securities, or TIPS. Issued with maturities of five, 10 and
30 years, TIPS shelter you from inflation risk because their principal is adjusted semiannually for inflation
based on changes in the Consumer Price Index-Urban Consumers (CPI-U), a widely used measure of
inflation. Interest payments are calculated on the inflated principal. So, if inflation occurs throughout the
life of the bond, interest payments will increase. At maturity, if the adjusted principal is greater than the
face or par value, you will receive the greater value.
Because they are U.S. Treasury securities, TIPS are backed by the "full faith and credit" of the U.S.
government and, therefore, carry virtually no credit or default risk. Remember the trade-off between risk
and reward? It holds for TIPS as well. While the TIPS investor is sheltered from inflation risk and, in fact,
benefits during periods of inflation, the trade-off is that the base interest rate on TIPS is usually lower
than that of other Treasuries with similar maturities. In periods of deflation, low inflation or no inflation, a
conventional Treasury bond can be the better-performing investment.
You might ask, "What happens if deflation (a negative inflation rate) occurs? Would my TIP investment be
worth less than what I paid for it?" No, unless you paid more than the face value of the bond. Upon
maturity, the Treasury Department agrees to pay the initial face value of the bond or the inflation-adjusted
face value, whichever is greater.

TIPS Risk Report Card

Interest rate risk: If interest rates rise, the value of your bond on the secondary
market will likely fall.
No inflation risk, because principal is adjusted semiannually for inflation based on
CPI-U.
No call risk and virtually no liquidity, event or credit and default risk.
Opportunity risk: In periods of no or low inflation, other investments, including other
Treasury bonds, may perform better.

For more information on TIPS, see TreasuryDirect's Treasury TIPS Web page.

TIPS Snapshot
Issuer

U.S. Treasury

Minimum Investment

$100

Interest Payment

Semiannually

How to Buy/Sell

At original issue through TreasuryDirect or broker. On the

secondary market through a broker.

Bond Interest Rate

Tied to Consumer Price Index. Rate information at

TreasuryDirect website or through a broker.

Price Information

TreasuryDirect for original issues. Broker data vendors for

secondary trade data.

Website for More Info

www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

STRIPS

The U.S. Treasury STRIPS program was introduced in the mid-1980s. STRIPS is the acronym for
Separate Trading of Registered Interest and Principal of Securities. The STRIPS program lets investors
hold and trade the individual interest and principal components of eligible Treasury notes and bonds as
separate securities. While "stripping" also happens to non-U.S. Treasury securities, this discussion
applies to stripped U.S. Treasury securities.
When a U.S. Treasury fixed-principal note or bond or a Treasury inflation-protected security (TIPS) is
stripped, each interest payment and the principal payment becomes a separate zero-coupon security.
Each component has its own identifying number and can be held or traded separately. For example, a
10-year Treasury note consists of 20 interest paymentsone every six months for 10 yearsand a
principal payment payable at maturity. When this security is "stripped," each of the 20 interest payments
and the principal payment become separate STRIPS, and can be held and transferred separately.
STRIPS can only be bought and sold through a financial institution or brokerage firm (not through
TreasuryDirect), and held in the commercial book-entry system.
Like all zero-coupon bonds, STRIPS sell at a discount because there are no interest payments. Your
income on a STRIP that is held to maturity is the difference between the purchase price and the amount
received at maturity. When you buy a STRIP, the only time you receive an interest payment is when your
STRIP matures.
Risk-adverse investors who want to receive a known interest payment at some specific date in the future
favor STRIPS. State lotteries and pension funds regularly invest in STRIPS to be assured they will be
able to meet annual payout obligations to prizewinners or pensioners.

STRIPS Risk Report Card

No call risk and virtually no liquidity risk, event risk or credit and default risk.
Interest rate risk: If interest rates rise, the value of your STRIP on the secondary
market will likely fall.
Inflation risk: STRIP yields may not keep up with inflation.

STRIPS Snapshot
Issuer

Financial institutions, government securities brokerdealers

Minimum Investment

$100

Interest Payment

Non-interest bearing: Pays out at maturity

How to Buy/Sell

At original issue and on the secondary market through a

broker. U.S. Treasury does not sell STRIPS to investors.

Bond Interest Rate

Determined at origination and varies by bond. Ask your

broker for the rate of individual STRIPS.

Price Information

Broker: Quotes are disseminated and traded over-thecounter. No automated quotation service available.

Website for More Info

www.treasurydirect.gov/instit/marketables/strips/strips.htm

U.S. Savings Bonds

Savings bonds are also issued by the federal government and backed by the "full faith and credit"
guarantee. But unlike Treasuries, savings bonds may be purchased for an investment as low as $25.

Like Treasuries, the interest earned on your savings bonds is subject to federal income tax, but not state
or local income taxes.
Savings bonds can be purchased from the U.S. Treasury, at banks and credit unions, and are often
offered by employers through payroll deduction. But unlike most other Treasuries, savings bonds cannot
be bought and sold in the secondary market. In fact, only the person or persons who have registered a
savings bond can receive payment for it.
Registration takes place at the time of purchase. You are allowed to register the savings bond to a single
person (single ownership), two people (co-ownership), or you can register the bond to a primary owner
and a beneficiary. In the case of co-ownership, either owner can cash in the bond without the other's
consent. If one of the co-owners dies, the other becomes the single owner.
For information about how to handle savings bonds left in the wake of a death, see TreasuryDirect's
information on Death of a Savings Bond Holder.

Smart Move
Learn about the advantages and disadvantages of using savings bonds to fund college education by
reading the savings bond section of FINRA's Smart Saving for College.

Electronic or Paper?

You can purchase savings bonds electronically through the

TreasuryDirect website. No physical certificate will exist.
TreasuryDirect allows you to buy, track, change registration
and redeem your bondall electronically via a secure online
account.

A new program called

SmartExchangeSM allows
TreasuryDirect account owners to
convert their paper savings bonds
to electronic securities in a special
Conversion Linked Account in their
online account.

Not ready to buy savings bonds in cyberspace? You can purchase a paper bond through thousands of
banks and other financial institutions, and through payroll deduction programs. Remember: When you
purchase a paper bond, it is up to you to keep it safe. To change the bond's registration, you will need to
go to a bank, credit union or your employer (if you're investing through payroll deduction). Though you
can obtain change of registration forms from TreasuryDirect online to redeem a paper bond, you present
the physical bond to your bank or credit union where you'll be given the cash value.

Taking Savings Bonds at Face Value

Whether you buy savings bonds electronically or in paper form, most savings bonds are sold at face
value in amounts from $25 to $30,000. This means that if you buy a $100 bond, it costs you $100, on
which you earn interest.
Exception: The Series EE savings bond is sold in paper form at one-half its face value. A $100 paper EE
bond costs you $50, with interest and taxes paid by the buyerfederal tax onlywhen the bonds are
cashed in. Note: Electronic EE bonds and all Series I bonds, including paper bonds, are sold at face
value.
While electronic bonds are available in any amount from $25 $30,000, paper bonds are only available
in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000.
Remember to Redeem!
Always check the savings bond's issue dates to find out if it is still earning interest. Depending upon the
date that you purchased your securities, it may be time to redeem them

Types of Savings Bonds

The two most common types of savings bonds are I Bonds and Series EE Savings Bonds. Both are
accrual securities, meaning the interest you earn accrues monthly at a variable rate and the interest is
compounded semiannually. You receive your interest income when you redeem the bonds.
The I Bond tracks inflation to prevent your earnings from being eroded by a rising cost of living. Series
EE Savings Bonds issued after May 2005 earn a fixed rate of interest. Both types of bonds are exempt
from all state and local income taxes.

What Are Patriot Bonds?

Think of them as flag-waving Series EE bonds. Patriot Bonds were first issued December 11, 2001.
These special Series EE savings bonds are inscribed with the special "Patriot Bond" inscriptionFor
more information on Patriot Bonds, see the Treasury Department's Patriot Bond FAQs Web page.

The chart below outlines the major differences between EE and I bonds.

EE Bond
Features

Interest

Cashing

I Bond

Electronic bonds issued/sold at face value (a

$100 electronically sold EE Bond costs $100);
paper bonds issued/sold in paper at 50
percent of face value (a $100 EE Bond costs
$50)

Same as EE

Electronic bonds can be bought in amounts of

$25 or more, to the penny. Paper bonds are
offered in eight denominations ($50, $75,
$100, $200, $500, $1,000, $5,000 and
$10,000)

Same as EE

$5,000 maximum purchase in one calendar

year per Social Security number

Same as EE

Bonds issued after May 2005 earn a fixed rate

of return. Variable rates for bonds bought from
May 1997 through April 2005 are calculated as
90 percent of six-month averages of five-year
Treasury Securities yields

Calculated in a formula using a fixed rate

of return and a semiannual inflation rate
based on CPI-U

Rates announced every May 1 and November

1

Same as EE

Paper bonds are guaranteed to reach face

value in 20 years

No guaranteed level of earnings

Bond increases in value monthly due to

interest, which compounds semiannually;
interest is paid when the bond is redeemed.

Generally increases in value monthly and

interest compounds semiannually (except
in periods of deflation when the bond
value could remain unchanged); interest is
paid when the bond is redeemed

Earn interest for up to 30 years

Same as EE

Can be cashed any time after 12 months

Same as EE

A three-month interest penalty applies to

bonds redeemed during the first five years

Same as EE

Financial institution reports interest earnings

(difference between redemption value and
purchase price) on IRS Form 1099-INT;

Same as EE

savings bonds are exempt from state and

local income taxes
Eligible for tax benefits upon redemption when
used for qualified education expenses

Same as EE

Source: TreasuryDirect publication "I and EE Savings Bond Comparison"

H is for Last Hurrah

Investors used to be able to convert their unredeemed Series EE bonds to HH bonds, deferring
taxation of interest until the HH bonds matured and were redeemed, often decades down the road.
However, as of September 1, 2004, the Bureau of the Public Debt no longer offers Series HH bonds
to the public. Holders of eligible E bonds may choose to invest proceeds of maturing issues in new
series EE or I bonds, or other savings vehicles.

Savings Bond Risk Report Card

No call or liquidity risk and virtually no credit and default risk.
Except for Series EE bonds issued before May 2005, all savings bonds are exposed
to interest rate risk.
Inflation risk: I bonds are protected from inflation, but EE bonds are not.
Opportunity risk exists, particularly for I bonds, which are particularly susceptible
during periods of low inflation and the rare instances of deflation.

I Bonds and EE Bonds Snapshot

Issuer

U.S. Treasury

Minimum Investment

$25

Interest Payment

Interest accrues monthlypaid when bond is redeemed

How to Buy/Sell

TreasuryDirect, Broker

Bond Interest Rate

I Bond interest rate is a combination of two separate rates

a fixed rate of return and a variable semiannual inflation
rate. See TreasuryDirect I Bonds.
EE Bonds issued after May 2005 offer fixed rates
determined when the bonds are issued. See TreasuryDirect
EE Bonds.

Price Information

TreasuryDirect or through a broker

Website for More Info

www.treasurydirect.gov

Agency Securities

"Agencies" is a term used to describe two types of bonds: (1) bonds issued or guaranteed by U.S. federal
government agencies; and (2) bonds issued by government-sponsored enterprises (GSEs)
corporations created by Congress to foster a public purpose, such as affordable housing.
Bonds issued or guaranteed by federal agencies such as the Government National Mortgage Association
(Ginnie Mae) are backed by the "full faith and credit of the U.S. government," just like Treasuries. This is
an unconditional commitment to pay interest payments, and to return the principal investment in full to
you when a debt security reaches maturity.
Bonds issued by GSEs such as the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage (Freddie Mac) are not backed by the same guarantee as federal
government agencies. Bonds issued by GSEs carry credit risk.
It is also important to gather information about the enterprise that is issuing the agency bond, particularly
if it is issued by a GSE. Two of the largest players in the agency bond marketFannie Mae and Freddie
Macare publicly traded companies who register their stock with the SEC and provide disclosures that
are publicly available including annual reports, quarterly reports and reports of current events that stand
to impact the company. These documents can give you insight into the economic health of the company,
the challenges and opportunities it faces, and short- and long-term corporate goals. These company
filings are available online on the SEC's website. It is important to learn about the issuing agency
because it will affect the strength of any guarantee provided on the agency bond. Evaluating an agency's
credit rating before you invest should be standard procedure.

On September 6, 2008, both Freddie Mac and Fannie Mae were placed into conservatorship by the
Federal Housing Finance Agency (FHFA), which regulates the countrys secondary mortgage markets.
As conservator, FHFA has ultimate control over the two organizations.

It takes $10,000 to invest in most agency bonds (Ginnie Maes are an exception, requiring a minimum
investment of $25,000), with the majority of agency bonds paying a semiannual fixed coupon. There is a
relatively active (liquid) secondary trading market for agencies, though it is important for investors to
understand that many agencies are tailored to the needs of a particular investor or class of investors
with the expectation that they will be held until maturity. This is especially true of structured agency
securities (agencies with special features, which are often not suitable for individual investors).
Most agency bonds pay a semiannual fixed coupon and are sold in a variety of increments, though the
minimum investment level is generally $10,000 for the first increment, and $5,000 increments thereafter.
The tax status of agency bonds varies. Interest from bonds issued by Freddie Mac and Fannie Mae is
fully taxable, while those issued by some other GSEs offer state and local tax exemptions. Capital gains
and losses on the sale of agency bonds are taxed at the same short- and long-term rates (for bonds held
for one year or less or for more than one year) as for stocks.
Most Active GSE Agency Bond Issuers
Legal Name

Common Name

Tax Status

Federal Farm Credit Banks Funding Corporation

Farm Credit

State and local exempt

Federal Home Loan Banks

FHL Banks

State and local exempt

Federal Home Loan Mortgage Corporation

Freddie Mac

Fully taxable

Federal National Mortgage Association

Fannie Mae

Fully taxable

Tennessee Valley Authority

TVA

State and local exempt

Types of Agencies

Agency bonds can be structured to meet a specific need of an investor, issuer or both.
For instance, in addition to the traditional coupon-paying agency bond, some organizations issue nocoupon discount notescalled "discos"generally to help them meet short-term financing demands.
This explains why disco maturities are usually quite short, ranging from a single day to a year. Discos
resemble STRIPS in that they are zero-coupon securities that are issued at a discount to par. As with all
bonds that trade at such a discount, if you sell the bond before it matures, you may lose money.
Another type of structured agency security is a step-up note, or "step-up." These securities are callable
with a coupon rate that "steps up" over time according to a pre-set schedule. The goal of a step-up is to

minimize the impact of interest rate risk. Provided the security is not called, the step-up will keep
providing the bondholder with an increased coupon rate, cushioning the investor from interest rate risk.
Step-ups are not problem-free, however, as they often offer limited call protection.
Yet another type of agency is a floating-rate security, or "floater." Floaters pay a coupon rate that changes
according to an underlying benchmark, such as the six-month T-bill rate.
Keep in mind that such structured notes, and other esoteric products such as index floaters and range
bonds, can be quite complicated and may be unsuitable for individual investors.

Agency Risk Report Card

Credit and default risk are real for GSE-issued agencies: The federal government is
under no legal obligation to save a GSE from default.
Call risk: Many agency securitiesstep-ups in particularcarry call provisions that
allow the issuer to pay you prior to the bond's maturity date, typically when interest
rates drop, leaving you to reinvest at lower prevailing rates.
Interest rate risk: If interest rates rise, the value of an agency bond on the secondary
market will likely fall.

Agency Bonds Snapshot

Issuer

Government-sponsored enterprises (GSEs)

Minimum Investment

Variesgenerally $10,000

Interest Payment

Fixed coupon or floating/variable coupon rates. Interest is

paid semiannually for fixed-coupon security.

How to Buy/Sell

Through a broker

Bond Interest Rate

Determined at origination and varies by bond

Price Information

Issue price and secondary trade data available through a

broker and data vendors

Website for More Info

Securities Industry and Financial Markets Association

(SIFMA)The GSE Debt Market: An Overview

Mortgage-Backed Securities

Mortgage-backed securities, called MBSs, are bonds secured

by home and other real estate loans. They are created when
a number of these loans, usually with similar characteristics,
are pooled together. For instance, a bank offering home
mortgages might round up $10 million worth of such
mortgages. That pool is then sold to a federal government
agency like Ginnie Mae or a government-sponsored
enterprise (GSE) such as Fannie Mae or Freddie Mac, or to a
securities firm to be used as the collateral for the new MBS.

Bond Fact
Unlike most bonds that pay
semiannual coupons, investors in
mortgage-backed securities
receive monthly payments of
interest and principal.

The majority of MBSs are issued or guaranteed by an agency of the U.S. government such as Ginnie
Mae, or by government-sponsored enterprises (GSEs), including Fannie Mae and Freddie Mac.
Mortgage-backed securities carry the guarantee of the issuing organization to pay interest and principal
payments on their mortgage-backed securities. While Ginnie Mae's guarantee is backed by the "full faith
and credit" of the U.S. government, those issued by GSEs are not.
A third group of MBSs is issued by private firms. These "private label" mortgage-backed securities are
issued by subsidiaries of investment banks, financial institutions and homebuilders whose
creditworthiness and rating may be much lower than that of government agencies and GSEs.
The minimum investment amount is generally $1,000 (although it's $25,000 for Ginnie Maes). Secondary
trading of mortgage-backed bonds is relatively liquid in normal economic conditions and done over the
counter, between dealers. Investors work with brokers, preferably those with specialized expertise in the
mortgage bond arena, to buy and sell these bonds.
Because of the general complexity of mortgage-backed securities, and the difficulty that can accompany
assessing the creditworthiness of an issuer, use caution when investing. They may not be suitable for
many individual investors.

Mortgage-Backed Securities

Varied Monthly Interest Payments

Unlike a traditional fixed-income bond, most MBS
bondholders receive monthlynot semiannualinterest
payments. There's a good reason for this. Homeowners

Varied Monthly Payments

There's one more thing about
those portions you've been getting
they are not the same each
month. For this reason, investors
who draw comfort from a
dependable and consistent
semiannual payment may find the
unpredictability of mortgagebacked securities unsettling.

(whose mortgages make up the underlying collateral for the MBS) pay their mortgages monthly, not twice
a year. These mortgage payments are what ultimately find their way to MBS investors.
There's another difference between the proceeds investors get from mortgage-backed bonds and, say, a
Treasury bond. The Treasury bond pays you interest onlyand at the end of the bond's maturity, you get
a lump-sum principal amount, say $1,000. But a mortgage-backed bond pays you interest and principal.
Your cash flow from the mortgage-backed security at the beginning is mostly from interest, but gradually
more and more of your proceeds come from principal. Since you are receiving payments of both interest
and principal, you don't get handed a lump-sum principal payment when your MBS matures. You've been
getting it in portions every month.
MBS payments (cash flow) may not be the same each month because the original pass-through
structure reflects the fact that homeowners themselves dont pay the same amount each month. They
often make unscheduled payments of principal, or prepayments. For this reason, MBS investors are
subject to prepayment risk. The risk is highest when interest rates fall and homeowners refinance
(prepay an existing mortgage). The resulting wave of prepayments means that theres a greater chance
that the MBS investor will be paid all of the interest and principal ahead of schedule.
There are advantages to this payment structurenamely, you have your money in handbut the climate
for reinvestment has deteriorated. Interest rates have declined and you cant get the same return you
had with your original bond. So, be aware that refinancing booms can be a bust for MBS investors. At the
same time, issuers increasingly apply statistical models to smooth out monthly payments. Also, the passthrough structure of aggregating large numbers of loans at a single fixed rate also helps keep cash flows
relatively consistent. Since the mid-1980s, issuers have also offered a type of collateralized mortgage
bond called planned amortization class, or PAC bonds, designed to reduce volatility associated with
prepayments.

Types of Mortgage-Backed Securities

Pass-Throughs
The most basic mortgage securities are known as pass-throughs. They are a mechanismin the form of
a trustthrough which mortgage payments are collected and distributed (or passed through) to
investors. The majority of pass-throughs have stated maturities of 30 years, 15 years and five years.
While most are backed by fixed-rate mortgage loans, adjustable-rate mortgage loans (ARMs) and other
loan mixtures are also pooled to create the securities. Because these securities "pass through" the
principal payments received, the average life is much less than the stated maturity life, and varies
depending upon the paydown experience of the pool of mortgages underlying the bond.
Collateralized Mortgage Obligations (CMOs)
Collateralized mortgage obligations, CMOs for short, are a complex type of pass-through security.
Instead of passing along interest and principal cash flow to an investor from a generally like-featured pool
of assets (for example, 30-year fixed mortgages at 5.5 percent, which happens in traditional pass-

through securities), CMOs are made up of many pools of securities. In the CMO world, these pools are
referred to as tranches, or slices. There could be scores of tranches, and each one operates according to
its own set of rules by which interest and principal gets distributed. If you are going to invest in CMOs
an arena generally reserved for sophisticated investorsbe prepared to do a lot of homework and spend
considerable time researching the type of CMO you are considering (there are dozens of different types),
and the rules governing its income stream.
Many bond funds invest in CMOs on behalf of individual investors. To find out whether any of your funds
invests in CMOs, and if so, how much, check your fund's prospectus or SAI under the headings
"Investment Objectives" or "Investment Policies."
To recap, both pass-throughs and CMOs differ in a number of significant ways from traditional fixedincome bonds.
Fixed-Coupon Bonds

Mortgage Bonds

Semiannual coupon

Monthly coupon

Coupon amount stays the same each time

Coupon amount varies each month

Coupon is interest only

Coupon is interest and principal

Collect principal when bond matures

Collect principal incrementally each month

Concise maturity date

"Average life," an estimate of when the bond will

mature

Mortgage-Backed Securities Risk Report Card

Credit and default risk are real for MBSs issued by GSEs: The federal government is
under no legal obligation to save a GSE from default.
Prepayment risk that acts much like call risk: You get your principal back sooner than
the stated maturity, but the reinvestment opportunities are limited due to the
inconsistent prepayment rates, which are driven by real estate mortgage interest
rates and refinancing trends; population, geographic mobility and employment
opportunities; and social and economic factors that are difficult to model.
Extension risk: The opposite of prepayment riskthe risk that interest rates will go
up, lengthening the estimated maturity (but not the stated maturity) of your MBS and
creating more holding-period risk.
Interest rate risk: If interest rates rise, the value of a mortgage-backed security on the
secondary market will likely fall.

Mortgage-Backed Securities Snapshot

Issuer

Agencies of the federal government, GSEs and private

financial organizations

Minimum Investment

Variesgenerally $10,000

Interest Payment

Generally paid monthly with payments varying each month

How to Buy/Sell

Through a broker

Bond Interest Rate

Determined at origination and varies by bond

Price Information

Issue price and secondary trade data available through a

broker and data vendors

Website for More Info

SIFMA: What are Mortgage Securities?

Municipal Bonds

Municipal securities, or "munis," are bonds issued by states,

cities, counties and other governmental entities to raise
money to build roads, schools and a host of other projects for
the public good.

Bond Fact
It would take 90 pages in your daily
newspaper to list the more than
50,000 state and local entities that
issue municipal securities and the 2
million separate bond issues
available for trading.

Source: SIFMA
Munis pay a specified amount of interest (usually
semiannually) and return the principal to you on a specific
maturity date. Most munis are sold in minimum increments of $5,000 and have maturities that range from
short term (2 5 years) to very long term (30 years).
Muni Price and Disclosure Information
On January 31, 2005, investors gained the ability to see municipal bond prices in real time when the
Municipal Securities Rulemaking Board (MSRB) began making intraday pricing information available for
all municipal bond trades.

Price data is available to investors and dealers alike at SIFMA's website. This information is also
accessible on the left navigation of all pages of FINRA's Smart Bond Investing.
You can buy and sell municipal notes or bonds at issue or in the secondary market through the roughly
2,200 banks and brokerages registered to trade municipal securities. In spite of newly improved pricing
transparency, be prepared to shop around for the best price, with different dealers often quoting you
much different prices for the same bond.
The MSRB currently makes official statements and other muni bond disclosures available to the public
for free through its Electronic Municipal Market Access (EMMA) website. Ongoing disclosures submitted
by issuers are available to the public for free through EMMA, along with real-time trade pricing and up-todate interest rate information on variable rate and auction rate securities.
When considering an investment in municipal bonds, bear in mind that no two municipal bonds are
created equaland carefully evaluate each investment, being sure to obtain up-to-date information
about both the bond and its issuer. For more information, see FINRA's Investor Alert Municipal Bonds
Staying on the Safe Side of the Street in Rough Times

Buying and Selling Munis

While the muni bond market is active, with a daily trading volume in excess of $10 billion, some bonds
are more liquid than others. Some bonds trade actively, while others may have no activity (no interested
buyers or sellers) for weeks at a time. As a general category, municipal bonds tend to be more sensitive
to forces of supply and demand than other fixed-income categories. This has the net effect of increasing
your market risk: If your bond is out of favor with other investors at the time you need to sell, the price
you will get for the bond in the secondary market will suffer. And of course, like all bonds, munis are
subject to interest rate riskif rates rise above the rate of your bond, the value of the bond in the
secondary market declines.
Because of the dizzying number of muni bonds available (virtually no two bonds are alike), and the fierce
competition among dealers to gain a piece of the business, you should enter into muni investing with
care. Do your homework, starting with the selection of an investment professional with a proven track
record of municipal securities expertise.
When considering an investment in municipal bonds, bear in mind that no two municipal bonds are
created equaland carefully evaluate each investment, being sure to obtain up-to-date information
about both the bond and its issuer. For more information see FINRA's Investor Alert, Municipal Bonds
Staying on the Safe Side of the Street in Rough Times

Munis and Taxes

The primary reason most individual investors buy municipal bonds is because they afford favorable tax
treatment on the interest an investor earns. Interest on the vast majority of municipal bonds is free of
federal income tax. Indeed, municipal securities are the ONLY securities for which this is the case.
Furthermore, if you live in the state or city issuing the bond, you may also be exempt from state or city
taxes on your interest income. Bonds issued by Puerto Rico, Guam and other U.S. territories are taxexempt for residents of all states.
Not all municipal bonds are free from federal tax. Taxable municipal bonds may be issued to finance
projects that the federal government won't subsidize. To compensate investors for their lack of a tax
break, these bonds tend to offer yields higher than tax-exempt municipal bonds, and more in line with
rates of corporate or agency bonds.

AMT Awareness
The alternative minimum tax (AMT) is a tax some people have to pay. The AMT is figured by a different
set of rules than your normal income tax computation, but whichever computation comes out higher is
the one you have to pay. Investors who purchase "private activity" bondsbonds that are not exclusively
used for government functionsmay be subject to the AMT. Unlike other municipal bondsincluding
501(c)(3) private activity bondsinterest earned on these "private activity bonds" cannot be deducted
according to AMT rules and may trigger an AMT payment. A responsible financial professional should
evaluate your AMT liability before recommending a tax-exempt investment. You should also seek the
advice of a tax professional

Muni Math

Because interest payments from municipal bonds are usually exempt from federal income tax, their aftertax rates of return are attractive if you're in a higher tax bracketeven though a tax-free bond usually
has a lower yield than a taxable bond. For comparison purposes, you can determine your net (after-tax)
yield from a taxable bond by subtracting the amount of yield from your marginal tax rate (based on your
filing status).
Figuring Taxable Equivalent Yield
Figuring the taxable equivalent yield of a municipal bond is the first step in deciding whether to buy it.

For example, if a municipal bond is offered at a yield of 6 percent and you are in the 30 percent bracket,
do the following:

Convert your tax bracket to a decimal, or 0.30.

The taxable equivalent yield is 6 divided by (1 - .30) = 6 .70 = 8.57.

To match the 6 percent tax-free yield, you'd need a taxable bond paying at least 8.57 percent.
Useful Resource: SIFMA offers a Tax Year Tax-Exempt Taxable Yield Equivalent Chart on its website.

Types of Munis

There are two common types of municipal bonds:

General obligation bonds, also known as GOs, are issued by states, cities or counties. They are
backed by the "full faith and credit" of the government entity issuing the bonds. This backing is only as
strong as the entity's ability to levy taxes on its citizens, and in some cases charge user or assessment
fees. The creditworthiness of GOs is based primarily on the economic vitality of the issuer's tax base.
Highly-rated GOs tend to have a strong tax base.

Revenue Bonds are backed solely by fees or other revenue generated or collected by a facility,
such as tolls from a bridge or road, or leasing fees. The creditworthiness of revenue bonds tends to
rest on a debt service coverage ratiothe relationship between revenue coming in and the cost of
paying interest on the debt. Highly-rated revenue bonds usually have a debt service ratio of two or
more (the revenue that comes in is twice as much as the cost of paying interest on the debt).
Investor Warning:
Unrated and low-rated muni bonds exist and are actively sold, and defaults occur. You should carefully
weigh the significant risk of investing in highly speculative securities. While the absence of a credit rating is
not, by itself, a determinant of low credit quality, investors in non-rated bonds should be prepared to make
their own independent credit analysis of the bonds. If you are unable to do so, then ask yourself if losing
your investment is worth the higher coupon rate these bonds may carry.
Bond Insurance and Other Features
In addition to the general muni bond categories above, you can buy muni bonds with special features.
For example, some muni bond issuers include a repayment protection featuremost often bond
insuranceto insure their bonds at the time they are issued. A bond with insurance generally is able to
come to market with a higher credit rating, making the bond more attractive to buyers, and at the same

time lowering the issuing cost to the municipality. The protection can shield an investor from default risk
to the extent that the protection provider promises to buy the bonds back or to take over payments of
interest and principal if the issuer defaults.
Anticipation notes are short-term notes that are used by states and cities to meet a short-term financing
need. They usually mature in less than a year and are generally issued at par and pay interest at
maturity.
Other types of munis are floating-rate and variable-rate muni bonds. These bonds are extremely shortterm investments that are issued with seven-day and 28-day put features, allowing the investor to "put"
the bond back to the issuer or issuer agent. Generally, the bond's interest rate is recalculated on the "put"
date based upon a percentage of prevailing rates for Treasury bills or other interest rates.
There are also municipal securities, including zero-coupon munis, that are structured to give investors a
lump-sum payment at maturity that is equivalent to the principal invested, but have no regular interest
payments. These bonds are issued at a deep discount to the maturity. This type of muni is often used to
save for a specific event, such as college education, but because they do not pay interest until maturity,
their prices can be volatile.
Like most other bonds, munis can have call provisions. Indeed, a high percentage of munis are callable,
a feature that helps protect the issuer from interest rate risk and manage spending.

Smart Muni Moves

Do your homework before investing in munis:

Before buying GOs, research the state, city or county that's issuing the bond. Pay particular
attention to population rates and other measures of the region's tax base, as well as any legal limits on
taxation authority. Keep in mind that a region's economic picture can change quickly, and with it the
taxes a bond issuer is able to levy and collect.

Before buying a revenue bond, ask your broker to give you the bond's debt service coverage
ratio, which is the net operating income divided by total debt service. Highly-rated bonds tend to have
a ratio greater than two.

With all munis, check to see if the rating has gone up, down or remained stable.

Do the tax math (or ask your broker) to make sure you are really better off buying a muni; you
may be better off with a lower-risk Treasury bond.

Weigh factors such as liquidity, maturity length, callability and transaction costs in your decisionmaking.

Ask your broker if a bond's issuer is up to date with its reporting of its annual financial/operating
data. Treat missing or past due financial information as a potential red flag.

Muni Bond Risk Report Card

Credit and default risk can vary greatly from bond to bond. Insured bonds help offset
this risk.
Call risk exists, not just for investors who buy bonds at issue, but also for those who
may have paid a premium for the bond in the secondary market, where it was priced
as if it would not be called. Should such a premium-priced bond in fact be called, its
value would drop.
Interest rate risk: If interest rates rise, the value of a municipal on the secondary
market will likely fall.
Liquidity risk: Some munis are more liquid than others.

Municipal Securities Snapshot

Issuer

States, cities, counties and other governmental entities

Minimum Investment

Generally $5,000

Interest Payment

Fixed, floating/variable and zero-coupon; interest is paid

semiannually for fixed-coupon security.

How to Buy/Sell

Through a broker

Bond Interest Rate

Determined at origination, varies by bond

Price Information

Municipal Bonds: www.investinginbonds.com

Website for More Info

www.msrb.org

Corporate Bonds

Bond Fact

Companies issue corporate bonds (or corporates) to raise

money for capital expenditures, operations and acquisitions.
Corporates are issued by all types of businesses, and are
segmented into major industry groups.

The corporate debt market is

approximately $6.3 trillion, making
it larger than the U.S. Treasury
bond and municipal bond markets
combined.

Source: SIFMA
Corporate bondholders receive the equivalent of an IOU from
the issuer of the bond. But unlike equity stockholders, the
bondholder doesn't receive any ownership rights in the corporation. However, in the event that the
corporation falls into bankruptcy and is liquidated, bondholders are more likely than common
stockholders to receive some of their investment back.
There are many types of corporate bonds, and investors have a wide-range of choices with respect to
bond structures, coupon rates, maturity dates and credit quality, among other characteristics. Most
corporate bonds are issued with maturities ranging from one to 30 years (short-term debt that matures in
270 days or less is called "commercial paper"). Bondholders generally receive regular, predetermined
interest payments (the "coupon"), set when the bond is issued. Interest payments are subject to federal
and state income taxes, and capital gains and losses on the sale of corporate bonds are taxed at the
same short- and long-term rates (for bonds held for less, or for more, than one year) that apply when an
investor sells stock.

SweetenersSpecial Features that Often Come at a Price to Investors

In an effort to make bonds more attractive to investors, issuers sometimes add special features called
"sweeteners" to a bond. For instance, one such sweetener is a survivor option, where the issuer
agrees to repurchase the bond at par from the investor's estate in the event of death. Survivor options
are not all alike and may contain limitations and special conditions. The insurance feature of insured
bonds is another type of sweetener. Investors should understand that sweeteners almost always
come at a priceeither as a direct cost to investors or a lower rate of return.

Most corporate bonds trade in the over-the-counter (OTC) market. The OTC market for corporates is
decentralized, with bond dealers and brokers trading with each other around the country over the phone
or electronically. Some bonds trade in small quantities (or odd lots) in the centralized environments of the
New York Stock Exchange (NYSE) and American Stock Exchange (Amex), and are also traded in the
OTC market.

TRACECorporate Bond Trade Reporting Comes of Age

TRACE (the Trade Reporting and Compliance Engine) was launched in 2002 to bring
transparency to the corporate bond market and create a regulatory database of corporate
bond information. TRACE enables individual investors to receive real-time information on the
actual sale price of virtually all U.S. corporate bonds and to see intra-day transaction data,
as well as aggregate end-of-day statistics (such as most active bonds, total volume,
advances and declines and new highs and lows). All broker-dealers that FINRA regulates are
required to report corporate bond transactions to the TRACE system.
Go to the TRACE Corporate Bond Data page for a snapshot of TRACE-reported corporate
bond information.

Types of Corporate Bonds

There are two concepts that are important to understand with respect to corporate bonds. The first is that
there are classifications of bonds based on a bond's relationship to a corporation's capital structure. This
is important because where a bond structure ranks in terms of its claim on a company's assets
determines which investors get paid first in the event a company has trouble meeting its financial
obligations.
Secured Corporates
In this ranking structure, so-called senior secured debt is at the top of the list (senior refers to its place on
the payout totem pole, not the age of the debt). Secured corporate bonds are backed by collateral that
the issuer may sell to repay you if the bond defaults before, or at, maturity. For example, a bond might be
backed by a specific factory or piece of industrial equipment.
Junior or Subordinated Bonds
Next on the payout hierarchy is unsecured debtdebt not secured by collateral, such as unsecured
bonds. Unsecured bonds, called debentures, are backed only by the promise and good credit of the
bond's issuer. Within unsecured debt is a category called subordinated debtthis is debt that gets paid
only after higher-ranking debt gets paid. The more junior bonds issued by a company typically are
referred to as subordinated debt, because a junior bondholder's claim for repayment of the principal of
such bonds is subordinated to the claims of bondholders holding the issuer's more senior debt.
Who Gets Paid First?
1. Secured (collateralized) bondholders
2. Unsecured bondholders
3. Holders of subordinated debt
4. Preferred stockholders

5. Common stockholders

Junk Bond Caution

Investing in below investment-grade (high yield) debt is risky: There is a real risk of default by noninvestment-grade companies. Nearly 11 percent of junk bonds defaulted during the peak of the 20082009 recession, compared to 10.5 percent in 2001, another recession year. In contrast, the average
default rate over the five-year period from 2003 to 2007 was just over 2 percent. For this reason,
diversification is considered vital in junk bond investing.
The cost of buying and selling junk bonds also can be high. If you invest in high yield bond funds, be
advised that expenses associated with these funds can be steep, as mutual funds pass on the cost of
buying and selling to the investor.

However, other types of claims also may have priority over the issuer's remaining assets over the claims
of all bondholders (e.g., certain supplier or customer claims). Therefore, although bondholders generally
are paid prior to stockholders in a bankruptcy proceeding, this may offer little comfort if the issuer's assets
are reduced to zero by other creditors that have the right to be paid before bondholders of a particular
class of bonds.

Investment and Non-Investment Grade Corporates

The second concept that is important to understand when dealing with corporate bonds is that of credit
quality. As discussed in Risk from A to D, corporate bonds tend to be categorized as either investment
grade or non-investment grade. Non-investment grade bonds are also referred to as "high yield" bonds
because they tend to pay higher yields than Treasuries and investment-grade corporate bonds. However,
with this higher yield comes a higher level of risk. High yield bonds also go by another name: junk bonds.
Some corporate bonds are more liquid than others. Credit rating, yield and a host of other factors play on
supply and demand. While you may not have trouble finding a buyer for the bond of a giant company, the
ability to find a buyer for a low-grade, infrequently traded bond issued by a small company that few have
heard about may be quite difficult (reflected in a much wider bid-ask spread). For more information, see
Buying and Selling Corporate and Municipal Bonds.
Guaranteed and Insured Bonds
Certain bonds may be referred to as guaranteed or insured. This means that a third party has agreed to
make the bond's interest and principal payments, when due, if the issuer is unable to make these

payments. You should keep in mind that such guarantees are only as valuable as the creditworthiness of
the third-party making the guarantee or providing the insurance.
Convertibles
Convertible bonds offer holders the income of regular bonds and also an option to convert into shares of
common stock of the same issuer at a pre-established price, even if the market price of the stock is
higher. Convertible bond prices are influenced most by the current priceand the perceived prospects of
the future priceof the underlying stock into which they are convertible. As a tradeoff for this conversion
privilege, convertible bonds typically yield less.
Smart Idea. You should be careful to understand the conditions under which the bonds may be converted
as this right is often contingent upon, among other things, the issuer's stock reaching a certain price level.
You also should ask your broker or financial adviser whether there is any charge or fee associated with
making a conversion.

Reading a Corporate Bond Table

Reading a Corporate Bond Table

Unlike stocks, the bond prices you see online or in the newspaper are not the actual dollar prices.
They're really percentages of a bond's par value (usually $1,000). A corporate bond quoted at 99.2 is
actually 99.2 percent of $1,000, which makes the price $992. The easiest procedure for arriving at a
bond's price is to simply move the decimal point one position to the right.
Most Active Investment Grade Bonds
Issuer Name
AT&T WIRELESS SERVICES

Symbol Coupon Maturity

AWE.GB 7.875% Mar 2011

Rating
Moody's/S&P
Baa2/--

High

Low

Last

118.055 117.797 118.032

% Change % Yield
0.017

4.445

Header: Type of bond. In this case, investment-grade corporate.

Column 1: Issuer NameThe entity that issued the bond.
Column 2: SymbolFINRA trading symbol that identifies the individual issue.
Column 3: CouponThe stated interest rate that the issuer pays to the bondholder. This rate can be
fixed or variable depending on the structure of the bond.

Column 3: MaturityThe date on which the bond's issuer will pay back the principal value to the
bondholder. In some charts, only the last two digits of the year are quoted: for example, 20 means 2020,
12 is 2012.
Column 4: RatingThe credit rating from a Nationally Recognized Statistical Rating Organization
(NRSRO) that is an assessment of the creditworthiness of the issuer and likelihood of its default, which
impacts its ability to pay a bond's principal and interest.
Column 5: HighThe intraday (if real-time) or previous day's highest price at which the bond traded.
Prices below 100 are trading at a discount to par, and those above 100 are trading at a premium to par.
Column 6: LowThe intraday (if real-time) or previous day's lowest price at which the bond traded.
Prices below 100 are trading at a discount to par, and those above 100 are trading at a premium to par.
Column 7: LastThe intraday (if real-time) or previous day's most recent or last price at which the bond
traded. Prices below 100 are trading at a discount to par, and those above 100 are trading at premium to
par.
Column 8: % ChangeChange in price from the previous price at which the bond traded.
Column 9: % YieldThe annual percentage rate of return an investor will receive until the bond is called
(Yield-to-Call or YTC) or matures (Yield-to-Maturity or YTM). YTM is commonly used. However, the Yieldto-Worst (YTW), which is the lower of the YTC or YTM, is also used frequently. When a bond is trading at
a premium (above 100), a bond's yield is less than its coupon. When a bond is trading at a discount
(below 100), the bond's yield is more than its coupon.

Corporate Bond Risk Report Card

Credit and default risk: Varies significantly from bond to bond and is sometimes hard
to determine.
Liquidity risk: Many corporate bonds are illiquid, making it hard to find a buyer if you
need to sell your bond.
Interest rate risk: If interest rates rise, the value of a corporate bond on the secondary
market will likely fall.
Event risk: Mergers, acquisitions and other tumultuous events can have a negative
impact on a bond issuer's ability to pay its creditors.

Corporate Securities Snapshot

Issuer

Corporate entity

Minimum Investment

Generally $1,000

Interest Payment

Fixed, floating/variable and zero-coupon. Interest is paid

semiannually for fixed-coupon security.

How to Buy/Sell

Through a broker

Bond Interest Rate

Determined at origination, varies by bond

Price Information

FINRA Market DataBonds

Website for More Info

FINRA Market DataBonds

International and Emerging Market Bonds

Just as you can buy bonds from the U.S. government and U.S. companies, you can purchase bonds
issued by foreign governments and companies. Since interest rate movements may differ from country to
country, international bonds are another way to diversify your portfolio. Since information is often less
reliable and more difficult to obtain, you risk making decisions on incomplete or inaccurate information.
Like Treasuries, international and emerging market bonds are structured similarly to U.S. debt, with
interest paid semiannually, although European bonds traditionally pay interest annually. Unlike U.S.
Treasuries, however, there are increased risks in buying international and emerging market bonds
(described below), and the cost associated with buying and selling these bonds is generally higher and
requires the help of a broker.
International bonds expose you to a mixture of risks that are different for each country. A country's unique
set of risks is known collectively as sovereign risk. A nation's political, cultural, environmental and
economic characteristics are all facets of sovereign risk. Unlike Treasuries, which carry essentially zero
default risk, default risk is real in emerging markets, where the sovereign risk (such as political instability)
could result in the country defaulting on its debt.
Furthermore, investing internationally also exposes you to currency risk. Simply stated, this is the risk
that a change in the exchange rate between the currency in which your bond is issuedeuros, sayand

the U.S. dollar can increase or decrease your investment return. Because an international bond trades
and pays interest in the local currency, when you sell your bond or receive interest payments, you will
need to convert the cash you receive into U.S. dollars. When a foreign currency is strong compared to
the U.S. dollar, your returns increase because your foreign earnings convert into more U.S. dollars.
Conversely, if the foreign currency weakens compared to the U.S. dollar, your earnings are reduced
because they translate into fewer dollars. The impact of currency risk can be dramatic. It can turn a gain
in local currency into a loss in U.S. dollars, or it can change a loss in local currency into a gain in U.S.
dollars.
Some international bonds pay interest and are bought and sold in U.S. dollars. Called yankee bonds,
these bonds are generally issued by large international banks and most receive investment-grade
ratings. Indeed, credit rating services such as Moody's and Standard & Poor's, which evaluate and rate
domestic bonds, also provide Country Credit Risk Ratings that are helpful in determining risk levels
associated with international and emerging market government and corporate bonds.

International Bond Risk Report Card

Credit and default risk: Varies significantly from bond to bond and is sometimes hard
to determine.
Liquidity risk: As with many U.S. corporate bonds, it can be difficult to find a buyer for
an international government or corporate bond.
Currency risk: The risk that a change in the price of the U.S. dollar or currency of the
country in which the bond is issued will have a negative impact on return.
Interest rate risk: If interest rates rise, the value of an international bond on the
secondary market will likely fall.
Event risk: Mergers, acquisitions and other tumultuous events can have a negative
impact on a bond issuer's ability to pay its creditors.

International Bond Snapshot

Issuer

International government, corporate entity or other nondomestic issuer

Minimum Investment

$1,000

Interest Payment

Fixed, floating/variable and zero-coupon. Interest may be

paid semi-annually or (for Eurobonds) annually.

How to Buy/Sell

Through a broker with international expertise

Bond Interest Rate

Determined at origination, varies by bond

Price Information

Through a broker with international expertise

Website for More Info

European Government Bonds

Money Market Securities and More

A number of other bond categories exist that are primarily traded by professional investors and differ from
Treasuries, munis, corporates, agencies and mortgage-backed securities.
Money Market Securities
Money market instruments include bankers' acceptances, certificates of deposit and commercial paper.
Bankers' acceptances are typically used to finance international transactions in goods and services,
while certificates of deposit (CDs) are large-denomination, negotiable time deposits issued by
commercial banks and thrift institutions. Commercial paper takes the form of short-term, unsecured
promissory notes issued by both financial and non-financial corporations.
Some combination of these products makes up a money market fund. All money market funds are
required to have a dollar-weighted average portfolio maturity that cannot exceed 90 days. While money
market securities are highly liquid (you can usually receive your money in a few days, compared to
months or years with a CD), the interest you earn on your money tends to be quite low and may not keep
pace with inflation.
Asset-Backed Securities
Asset-backed securities (ABSs) are certificates that represent an interest in a pool of assets such as
credit card receivables, auto loans and leases, home equity loans, and even the future royalties of a
musician (for instance, Bowie bonds). Once you get beyond mortgage-backed securities, which are a
type of asset-backed security, investing and trading in the asset-backed market is almost exclusively
done by more sophisticated investors. The interest and principal payments on the pool of assets are
passed through to investors in the form of short-term bonds that generally carry an investment-grade
credit rating, and these bonds are relatively liquid. The ABS market has grown rapidly of late and now
comprises well over $2 trillion in outstanding debt.

The ABS market grew rapidly during the late 1990s and early 2000s, reaching a peak in 2006. While new
issues of ABS debt dropped off during the economic turbulence of 2008 and 2009, they rose in the first
half of 2010. As of December 2009, there was more than $2.4 trillion in outstanding ABS debt.
Preferred Securities
There are two common types of preferred securities: equity preferred stock and debt preferred stock.
Equity preferred stock is much like common stock in that it never matures, and it declares dividends
rather than awarding regular interest payments. Debt preferreds, on the other hand, pay interest like
traditional bonds, and since they are corporate debt, they stand ahead of equity preferred securities in
the payout hierarchy should the company default. However, many preferreds are hybridsthey contain a
combination of debt and equity features, and it is not always clear which type of security they are. Unlike
traditional bonds, preferreds generally have a par value of $25 instead of the traditional $1,000. They
also tend to pay interest quarterly, rather than the traditional semiannual payment associated with most
bonds. Most preferreds are listed just like stocks, with the majority trading on the New York Stock
Exchange. Like traditional bonds, preferreds tend to have credit ratings, and upgrades and downgrades
often play an important role in the price a preferred can command in the secondary market.
Auction Rate Securities
Auction rate securities (ARS) are often debt instruments (corporate or municipal bonds) with long-term
maturities, but their interest rates can be regularly reset through Dutch auctions. ARS can also refer to
preferred stocks with dividend payments that reset through the same process. The frequent auctions
held every seven, 14, 28 or 35 daysalso allow investors who want to liquidate their investments to do
so. But when there is no demand for ARS, the auctions fail and investors cant access their investments.
They have to wait until the next successful auction or until the security matures, which may not occur for
several years. When an ARS auction fails, current investors will generally receive an interest rate or
dividend set above market rates for the next holding periodup to any maximum disclosed in the offering
documents.
For many years, investors purchased ARS seeking cash-like investments that paid a higher yield than
money market mutual funds or certificates of deposit. Those expectations changed in early 2008 when
credit market turbulence led many ARS auctions to fail. Many ARS investors who treated these securities
as a ready source of cash before 2008 found themselves short on readily available funds. In response,
some issuers of ARS offered to redeem shares at par value. Others have only offered to redeem some
but not all of the outstanding shares. For more information, see FINRAs Investor Alert, Auction Rate
Securities: What Happens When Auctions Fail.
Event-Linked Bonds
Event-linked bondsalso called insurance-linked, or catastrophe bondsare financial instruments that
allow investors to speculate on a variety of events, including catastrophes such as hurricanes,
earthquakes and pandemics. It is one way that insurance and reinsurance companies can transfer the
risk of some or all the policies they underwrite for a particular disaster or disasters to investors who are
willing to assume the risk. Event-linked securities generally offer higher interest rates than similarly rated
corporate bonds. But, if a triggering catastrophic event occurs, holders can lose most or all of their
principal and unpaid interest payments.

While individual retail investors generally cannot invest directly in event-linked securities, you can find out
whether any of the bond funds you own invest in catastrophe bonds or other similar event-linked
instruments. Check your funds prospectus and statement of additional information (SAI) to see whether
your fund is authorized to invest in event-linked securities and if so, how much. You can typically find this
information under the headings Investment Objectives or Investment Policies. For more information,
see FINRA's Investor Alert, Catastrophe Bonds and Other Event-Linked Securities.

Buying and Selling Bonds

The Bond Market

Bonds are issued to raise money for cities, states, the federal government and corporations. The primary
and secondary bond markets are an essential part of the capital-raising process. The public and private
sectors use the vast sums of money raised to do all sorts of thingsbuild roads, improve schools, open
new factories and buy the latest technology.
Bonds are bought and sold in huge quantities in the U.S. and around the world. Some bonds are easier
to buy and sell than othersbut that doesn't stop investors from trading all kinds of bonds virtually every
second of every trading day. To understand the process of buying and selling, it is first helpful to
understand the size and scope of the bond market, why bonds are issued in the first place and who
regulates this vast financial arena.
Bonds are big players on the global financial stage. U.S. bond market debt (generally referred to as "the
bond market") is nearly $35 trillionmaking it by far the largest securities marketplace in the world. The
term "bond market" is a bit misleading, because each type of bond has its own market and trading
systems.

2009 U.S. Outstanding Public and Private Debt

Debt listed in trillions

Bond Regulation

FINRA is among a number of organizations that oversee bond issuers' and dealers' activities. Here is a
breakdown of regulators and their responsibilities:

FINRA licenses brokers and brokerage firms that sell stocks, bonds and other securities; writes
rules to govern their conduct; conducts regulatory reviews of brokerage firm business activities; and
disciplines violators. If you believe you have been the subject of unfair or improper business conduct
by a brokerage firm or broker, you may file a complaint online at the FINRA Investor Complaint Center.

The SEC registers and regulates stocks, bonds, and other securities and companies that issue
securities. The SEC also regulates mutual fund products and companies, and financial advisers. If you
believe that you were defrauded or encountered problems with the issuer of a bond, a mutual fund
company or a financial adviser, you may file a complaint at the SEC Complaint Center.

The Municipal Securities Rulemaking Board (MSRB) develops rules regulating securities firms
and banks involved in underwriting, trading and selling municipal bonds. Responsibility for examination
and enforcement of MSRB rules is delegated to FINRA for all securities firms, and to the Federal
Deposit Insurance Corporation, the Federal Reserve Board and the Comptroller of the Currency for
banks.

State securities agencies enact and enforce state rules and regulations, and register and regulate
securities sellers and securities sold in their states.

Buying and Selling Treasuries and Savings Bonds

Treasury and savings bonds may be bought and sold through an account at a brokerage firm, or by
dealing directly with the U.S. government. New issues of Treasury bills, notes and bondsincluding TIPS
can be bought through a brokerage firm, or directly from the government through auctions at the U.S.
Treasury Department's TreasuryDirect website. You can also hold these in a TreasuryDirect account set
up at the same website, and sell them for a fee on the secondary market.
Savings bonds can also be purchased from the government, or through banks, brokerages and many
workplace payroll deduction programs. When it comes time to cash in your bond, most full-service banks
and other financial institutions are "paying agents" for U.S. savings bonds. Want to know the current
value of your savings bonds? You can download TreasuryDirect's Savings Bond Wizard.

Buying and Selling Corporate and Municipal Bonds

Like other types of bonds, corporate and municipal bonds may be purchased, like stock, through a
broker. Investors may either buy the bond at issue or in the secondary market. You buy a bond at issue
through full-service, discount or online brokers, as well as through investment and commercial banks.
Once new-issue bonds have been priced and sold, they begin trading on the secondary market, where
buying and selling is also handled by a broker. You will generally pay brokerage fees when buying or
selling corporates and munis through a brokerage firm.
When secondary trading begins, most corporate and municipal bonds sell on the over-the-counter (OTC)
market. Some bonds are traded in smaller quantities on the facilities of the New York Stock Exchange
(NYSE) and the American Stock Exchange (Amex), and a few trade on The Nasdaq Stock Market.
FINRA's TRACE system provides price and trade data for corporate and agency bonds, and the MSRB's
Electronic Municipal Market Access website provides trade data for municipals.

Buying Bonds through a Broker

You can buy virtually any type of bond through a brokerage firm. Some firms specialize in buying and
selling a specific type of bond, such as municipal bonds or junk bonds. Buying anything but Treasuries
and savings bonds typically requires using a broker.
You should understand that your brokerage firm is being compensated for performing services for you. If
the firm acts as agent, meaning it acts on your behalf to buy or sell a bond, you may be charged a
commission. In most bond transactions, the firm acts as principal. For example, it sells you a bond that
the firm already owns. When a firm sells you a bond in a principal capacity, it may increase or mark up
the price you pay over the price the firm paid to acquire the bond. The mark-up is the firm's
compensation. Similarly, if you sell a bond, the firm, when acting as a principal, may offer you a price that
includes a mark-down from the price that it believes it can sell the bond to another dealer or another
buyer. You should understand that the firm very likely has charged you a fee for its transaction services.
If the firm acts as agent, the fee will be transparent to you. The firm must disclose the amount of the
commission you were charged in the confirmation of the transaction. However, if the firm acts as
principal, it is not required to disclose to you on the confirmation how much of the total price you paid to
buy the security was the firm's mark-up; it is only required to disclose the price at which it sold the bond
to you and the yield. Similarly, if you sell a security to a firm and it acts as principal, the firm is not
required to tell you how much of a mark-down the firm incorporated in determining the price the firm
would pay you

Choosing a Broker

Most bond transactions for individual investors are handled through a broker. The vast majority of brokers
are honest, competent professionals, and there are organizations like FINRA to help make sure that the
few who are not are identified and disciplinedsometimes even barred from the industry. But there is
more to finding a broker than knowing which ones might not be trustworthy. The key is finding the broker
and brokerage firm that make you feel comfortable and best meet your personal financial needs.
There are many different types of brokerage firms, and the costs for their services vary according to how
much or how little they do for you. If you are a more experienced investor and have made up your own
mind about the securities you want to buy or sell, you might consider a discount brokerage firm that
charges a minimal fee for simply executing the transactions that you have selected. Online investing
services are the latest trend in discount brokeringyou do your own research, select your investment
and then trade online for a minimal fee. A full-service brokerage firm, on the other hand, charges a little
more, but typically provides you with information, support, recommendations and investment advice, in
addition to executing your transactions.
Whether you select a brokerage firm first and then choose a broker from among its associates, or find an
individual broker and accept the firm at which he or she is employed, it is strictly up to you. Either way,
when selecting a broker, you will want to take your time and do your homework.

You should also take time to understand how the broker is paid; ask for a copy of the firm's commission
schedule. Firms generally pay brokers based on the amount of money you invest and the number of
completed transactions in your account. More compensation may be paid if a broker is selling his or her
firm's own investment products. Ask what the fees or charges are for opening, maintaining and closing an
account.
At the initial interview, obtain a copy of the account agreement, fee structure and any other documents
you would be asked to sign if you were to open an account with that broker. That way, you can take the
paperwork home to read carefully at your own pace, and make comparisons if you are considering
brokers at several firms. If the prospective broker pushes you too hard to open an account on the spot,
this might be an indication that he or she will be overly aggressive in pushing you toward certain
investment decisions in the future. In addition to the documents that you would need to sign, some
brokerage firms have brochures or other informative material that would be helpful to you.
It's also a good idea to check the background of the broker and brokerage firm before you make a
selection. Investors may obtain information on the disciplinary record, professional background and
registration and license statuses of any FINRA-registered broker or brokerage firm by using FINRA
BrokerCheck. FINRA makes BrokerCheck available at no charge to the public. Investors can access this
service by linking directly to BrokerCheck at www.finra.org/brokercheck, or by calling (800) 289-9999.

FINRA Market Data

An array of bond information is available in the Market Data section of the FINRA website. The section
provides data on equities, options, mutual funds and a wide range of bondscorporate, municipal,
Treasury and agency bonds. It offers a full profile for every exchange-listed company, including company
description, recent news stories and Securities and Exchange Commission filings and an interactive list
of domestic securities the company issues. In addition, the site includes U.S. Treasury Benchmark yields,
market news, an economic calendar and other information indicating current market conditions. You can
find all of this information at www.finra.org/marketdata.
Using FINRA's Bond Market Data
The Bonds section of FINRA's Market Data brings individual investors much-needed transparency
(visible pricing) on corporate and other bond market transactions by providing investors with a means of
easily obtaining market information. The Web content contains the price and other information from
executed transactions in investment grade, non-investment grade and convertible corporate bonds as
reported to TRACE, as well as bond market data for municipal, Treasury and Agency bonds. In addition,
basic descriptive information and credit ratings on individual bonds are available.
Clicking on the Bonds link from the Market Data section takes you to a section devoted specifically to
bond information. Here, you can quickly search for bonds by bond type, symbol, coupon, yield and
maturity.

Five Good Reasons to Use FINRA's Bond Market Data:

1.
You have access to a broad database of bondsa database that contains far more bonds than
those a broker may recommend from his firm's inventory.
2.
You can search a bond by criteria you selectsuch as maturity date, rating, CUSIP and industry
category.
3.
You can compare the pricing and bond information you find here with information you receive
from your broker.
4.
You can create and track a bond portfolio to evaluate performance.
5.
You can familiarize yourself with bond pricing and terminology so that you are better prepared to
talk about bonds with a securities industry professional.

FINRA-Bloomberg Corporate Bond Indices

The Bonds area also features two valuable corporate bond indicesthe FINRA-Bloomberg Active
Investment Grade US Corporate Bond Index and the FINRA-Bloomberg Active High Yield US Corporate
Bond Index. These are powerful tools that investors can use on a daily basis to gauge overall market
direction and to measure the performance of their corporate bond holdings against the broader market.
The indices underlying transaction information is derived from data submitted to FINRAs Trade
Reporting and Compliance Engine (TRACE). As such, it is comprised of 100 percent of over-the-counter
transaction activity in the index components.
Each index is calculated the evening of every trading day, reflecting transactions through 5:15 p.m.
Eastern Time. Each index provides index values for Total Return, Price, Yield and Volume, with changes
from the previous close. Additional supporting information includes each indexs 10 most active bonds,
the top 10 leading movers and the top 10 lagging movers.
FINRA-Bloomberg Active US Corporate Bond Indices

Bonds and Taxes

As with buying and selling stocks, there are tax consequences associated with buying and selling bonds.
Interest Income
Whether or not you will need to pay taxes on a bond's interest income (coupons) or a bond fund's
dividends depends on the entity that issued the bond.

Corporate and Mortgaged-Backed BondsThe interest you get from corporate and mortgage
backed bonds typically is subject to federal and state income tax.

Treasuries and Other Federal Government BondsThe interest you earn on Treasuries and
agency bonds backed by the "full faith and credit" of the U.S. government is subject to federal income
tax, but not state income tax. This does not include bonds in which the U.S. government only provides
a guarantee such as with Ginnie Maes.

Municipal BondsMunicipal bonds are generally exempt from federal income tax. If the
municipal bond was issued by your state or local government, the interest on the bond is usually
exempt from state and local taxes, as well. However, if the bond was issued by a state or local
government outside of the state in which you reside, the interest from the bond is usually subject to
state income tax. Bonds issued by a U.S. Territory, such as Puerto Rico or Guam, however, are
exempt from federal, state and local taxes in all 50 states.
Understanding the Act
The 2003 tax reduction bill, formally known as the Jobs and Growth Tax Relief Reconciliation Act,
lowered taxes on stock dividends and long-term capital gains on securities held in taxable

accounts to a maximum of 15 percent. However, income from bond interest is not included in this
tax break.
Note: Some bond mutual funds refer to their taxable income distributions as "dividends," but these
are not stock dividends, and are not entitled to the lower 15 percent rate.
Be wary of making investment decisions based on current tax rates, especially since the lower
dividend and long-term capital gains tax rates are scheduled to end or "sunset" after 2010.
Gains
When you purchase an individual bond at face value and hold it to maturity, there is no capital gain to be
taxed. Of course, if you sell the bond for a profit before it matures, you'll likely generate a taxable gain,
even if it's a tax-exempt bond. If you owned the bond for more than a year, your gain is taxed at the longterm capital gain rate, which is currently, at most, 15 percent. If you owned the bond for one year or less,
you are taxed at the short-term rate, which can be as high as 35 percent.
With a bond fund, you are unlikely to sell at the exact share price at which you bought, which means you
incur a capital gain or loss. In addition, mutual fund managers buy and sell securities all year long,
incurring capital gains and losses. If the gains are more than the losses, shareholders will receive a
capital gain disbursement at the end of the year.
Rememberthe tax rules that apply to bonds are complicated. Before investing, you may want to
check with your tax advisor about the tax consequences of investing in individual bonds or bond
funds.

Smart Strategies
Asset Allocation
Buying bonds can be an important part of an asset-allocation strategy that balances risk and reward.
Asset allocation is all about diversification of investments, both within and among different asset classes.
In short, it means not putting all of your eggs into one basket.
In putting together a diversified portfolio, you select a mix of stocks, bonds and cash so as to arrive at the
risk-reward ratio that stands the best chance of reaching your investment objectives. In general, the
longer you have to invest, the greater risk you can assume because you might have the opportunity to
ride out short-term market losses in hopes of achieving greater long-term returns. But investing always

involves some degree of riskand risk comes in many flavors: inflation risk, liquidity risk, market risk and
so forth. Remember that your risk analysis will always be unique to you. If you have limited assets or
assets that you cannot or are not willing to lose, then you will want to think twice about the risks you take
especially risks that could result in your losing your principal or seeing the value of your investment
eroded by inflation.

Here's an example of how portfolios might be allocated for investors who are willing to accept the risks of
equities-based portfolios and who have differing investment horizons:
Investment Horizon

Stocks

Bonds

Cash

20 30 years to retirement

80%

15%

5%

10 20 years to retirement

60%

30%

10%

5 years to retirement

40%

40%

20%

Retirement age and beyond

30% or less

40 80%

20% or more

Generally speaking, the lower your tolerance for risk and the shorter your time horizon, the higher the
percentage of your portfolio that you should keep in cash or short-term bonds. While bond values will
fluctuate on the secondary market, in general (and with the exception of high-risk "junk" or emergingmarket bonds) their upward and downward price swings will be narrower than those of stocks.
Of course, when you are planning to retire, how much income you'll need in retirement will be important
in determining your asset mix, since the longer you plan to invest the money, the more risk you can afford
to take. Here's a calculator that can help you determine your retirement income needs.
At least once a year, you should evaluate your portfolio with an eye to rebalancing your mix of stocks,
bonds and cash to maintain the percentages you're comfortable with. For example, if bonds have
dramatically outperformed stocks in recent years, you might want to rebalance your portfolio by moving
some of your assets (or investing new money) into stocks.

Diversifying Within Your Bond Portfolio

Within the bond portion of your portfolio, you will also want to diversify your holdings. Here are two key
factors to consider when determining your bond allocation:
Tax Bracket
Your tax bracket may influence how you allocate investments among taxable and tax-exempt bonds. If
your current federal income tax bracket is 28 percent or higher, the tax savings on municipal bonds, for
instance, may be worth considering. Tax calculators are available on the Web, including SIFMA's
Investing in Bonds website, to help you determine how tax-exempt yields compare to taxable yields.
Risk Tolerance
Your risk tolerance depends on your own personal preferences as well as the number of years you have
until retirement. If you can't sleep at night because you're worrying about a downgrade in a high-yield
bond, then you'll want to consider lower-risk alternatives. You might consider diversifying your bond
holdings by using a strategy called laddering.

Bond Laddering

Laddering is a strategy that uses "maturity weighting," which involves dividing your money among
several different bonds with increasingly longer maturities, and is frequently recommended for
investors interested in using bonds to generate income. Laddering is used to minimize both
interest-rate risk and reinvestment risk. If interest rates rise, you reinvest the bonds that are
maturing at the bottom of your ladder in higher-yielding bonds. If rates fall, you are protected
against reinvestment risk because you have longer-maturity bonds at the top of your ladder that
aren't exposed to the drop.
For example, you might buy a two-year bond, a four-year bond and a six-year bond. If you put
approximately equal amounts of money in each bond, the average maturity of the entire portfolio
would be four years.
As each bond matures, you would replace it with a bond equal to the longest maturity in your
portfolio. For example, when the two-year bond matures, you replace it with a six-year bond. But
your older bonds are now two years closer to maturity, so the average weighted maturity of the
portfolio remains the samefour years.
A laddered portfolio is not limited to the maturities described above. You can build a ladder to
correspond to longer durations and include longer maturities. Your return would be higher than if
you bought only short-term issues. Your risk would be less than if you bought only long-term
issues. Laddering also helps you gain a greater degree of interest rate protection than if you

owned bonds of a single maturity. If interest rates fall, you may have to invest your bonds with the
shortest maturity date at a lower rate, but you'd be getting above-market return from the longermaturity issues. If rates go up, your total portfolio is apt to pay a below-market return, but you
could start correcting when your shorter-term bonds mature.
There is a downside to laddering: Your overall return may be lower than a non-laddered bond
portfolio.

Benefits of Laddering
Laddering's mix of short- and medium-term bonds helps to:

Minimize inflation risk

Reduce holding-period risk

Reduce the impact of interest rate fluctuations

Generate total return on par with long-term bonds

Encourage regular saving/investing

Bond Swapping

As the name suggests, bond swapping involves selling one bond and simultaneously purchasing another
similar bond with the proceeds from the sale. Why would you engage in this practice? You may wish to
take advantage of current market conditions (e.g., a change in interest rates), or perhaps a change in
your own personal financial situation has now made a bond with a different tax status appealing.
Bond swapping can also cause you to receive certain tax benefits. In fact, tax swapping is the most
common of bond swaps. Generally, anyone who owns bonds that are selling below their amortized
purchase price and who has capital gains or other income that could be partially, or fully, offset by a tax
loss can benefit from tax swapping. Tax law plays an important role in bond swaps so it is advised that
investors consult a tax advisor for the most up-to-date advice.

Reinvestment of Interest Income

Whenever possibleand especially if you have many years before retirementyou should reinvest your
bond interest (coupons). If you buy individual bonds, this takes discipline because you need to put each

coupon payment you receive to work earning interest rather than spend it. Consider putting them in a
brokerage money market account, or even opening a standard savings account just for your coupon
payments. At the end of each year, you can put them into the next bond in your laddering strategy.

Bond Funds
There are four types of bond funds: Mutual funds, closed-end funds, unit investment trusts (UITs) and
exchange traded funds (ETFs). While there are important distinctions between them, each type of fund
allows an investor to instantly diversify risk among a pool of bonds at a low minimum investment. For
those without a lot of money to invest, or who are investing through an employer-sponsored retirement
plan, such as a 401(k) or 403(b) where mutual funds are the primary investment option, bond funds may
represent the only realistic option to add this important asset class to your portfolio.
Before you invest in a bond fund, it is important that you understand the different fund types and how
bond funds differ from individual bonds. For instance, one common misconception about bond mutual
funds is that there is no risk to principal. This is not the case: Your initial and subsequent investments will
fluctuateand indeed may declinejust as they do if invested in a stock mutual fund.

Bond Mutual Funds

Mutual funds have become a preferred way to invest for millions of Americans. A mutual fund is simply a
pool of money invested for you by an investment firm in a variety of instruments like stocks, bonds or
government securities. Each mutual fund is different in its make-up and philosophy.
A bond mutual fund is a mutual fund that invests in bonds. Bond mutual funds can contain all of one type
of bond (munis, for instance) or a combination of bonds. Each bond fund is managed to achieve a stated
investment objective.

Good Reading
Investment companies that issue mutual funds are required by the SEC to provide you with a copy of the

mutual fund's prospectus. A fund's prospectus contains the formal written offer to sell securities. It also
sets forth specific information about the fund, including its investment objectives, risks, performance, fees
and expenses; how to buy and sell shares; and how the fund is managed. You should read a fund's
prospectus carefully before you invest.

Like most investments, bond mutual funds charge fees and expenses that are paid by investors. These
costs can vary widely from fund to fund or fund class to fund class. Because even small differences in
expenses can make a big difference in your return over time, we've developed a fund analyzer to help you
compare how sales loads, fees and other mutual fund expenses can impact your return.
Before investing in a bond mutual fund, find out if it's a load or no-load mutual fund. Load funds charge a
sales commission; no-load funds do not. When you pay a sales commission going in, that's called a
front-end load. A commission paid when you sell is known as a back-end load. The fee table is generally
found at the front of a mutual fund's prospectus.
There are a number of reasons to consider bond mutual funds:

They offer a convenient way to invest in a diversified portfolio of bonds (you simply contact your
broker or fund company)and do so in a way that is far more affordable than if you had to buy each
bond individually.

Bond mutual funds offer a variety of investment objectives. A bond mutual fund might invest in a
particular bond category (government, corporate, muni) or a particular maturity range (short-term,
intermediate, long-term). Many bond funds offer a combination of maturity ranges and bonds from
multiple categories.

Interest reinvestment is easy with a bond mutual fund. Funds pay "dividends" monthly (as
opposed to semiannually for most individual bonds). You can request to have these payments
automatically deposited back into the fund.

You can also invest incrementally. Most mutual funds allow you to invest even small amounts on
a regular basis, as well as make additional investments as you wish.

Finally, bond mutual funds offer considerable liquidity, you can generally get your money out of
the fund quickly.

Types of Bond Mutual Funds

Actively Managed Bond Mutual Funds

The most common type of bond funds, open-end funds, are actively managed bond funds that allow you
to buy or sell your share in the fund whenever you want. You buy and sell at a fund's net asset value
(NAV), which is the value or price per individual fund share and is priced at the end of each trading day
not throughout the day, as is the case with stocks.
Index Bond Mutual Funds
These funds are passively managed and are engineered to match the composition of a bond index, such
as the Barclays Capital Aggregate Bond Index. Once the fund is constructed and trading, very little
human intervention takes place; the fund's performance is structured to track that of the index it mirrors.
Regardless of the type of bond mutual fund you select, keep these points in mind:
1.
Return of principal is not guaranteed because of the fluctuation of the fund's NAV due to the everchanging price of bonds in the fund, and the continual buying and selling of bonds by the fund's
manager.
2.
As with direct bond ownership, bond funds have interest rate, inflation and credit risk associated
with the underlying bonds owned by the fund.
3.
In contrast to owning individual bonds, there are ongoing fees and expenses associated with
owning shares of bond funds.
4.
As with individual bonds, you pay income tax on bond interest according to your tax bracket, not
the 15 percent capital gains rate afforded to stock dividends in the 2003 Jobs and Growth Tax Relief
Reconciliation Act. See Understanding the Act.
Pop Quiz
Question: You just invested $5,000 in a bond mutual fund that invests
primarily in government bonds. Could you ever receive a statement that
shows the value of your investment to be worth less than this initial amount?
Yes

No

Check Your Answer

Correct: You selected Yes.
| Close |

Beyond Bond Mutual Funds

Closed-End Bond Funds

Like bond mutual funds, closed-end bond funds are actively managed. However, a closed-end fund has a
specific number of shares that are listed and traded on a stock exchange or over-the-counter market.
Like stocks, shares of closed-end funds are based on their market price as determined by the forces of
supply and demand in the marketplace. Shares may trade at a premium (above NAV) or, more often, at a
discount (below NAV). Investors should be aware that closed-end funds may be leveraged, meaning the
fund has issued or purchased stock or other investments using borrowed funds. While this leverage may
result in increased yield during favorable market conditions, it could also result in losses if market
conditions become unfavorable.
Exchange-Traded Funds
An exchange-traded fund (ETF) is like a mutual fund, but trades on one of the major stock markets and
can be bought and sold through a brokerage account throughout the trading day, like a stock. It can track
a specific stock or bond index such as the S&P International Corporate Bond Index or be actively
managed with a specific strategy in mind. And like stock investing, ETF investing involves principal risk
the chance that you won't get all the money back that you originally invested.
Unit Investment Trusts
UITs, as they are referred to, are made up of a fixed parcel of bonds that are held in a trust and rarely
change once the initial bond purchase is fixed, making it easier to estimate how much you will earn. UITs
are passively managed funds. On the trust's maturity date, the portfolio is liquidated and the proceeds
are returned to unit holders in proportion to the amount invested. Unit holders who want to sell before
maturity may have to accept less than they paid. While UITs are more diversified than an individual bond,
they are generally far less diversified than a bond mutual fund. Each bond in the UIT has its own maturity
date and often its own call provision as well, which can impact return and should be considered when
estimating earnings. As each bond matures, or is called (UITs carry call risk), the principal is paid out to
the shareholders until the last bond matures.

Bonds versus Bond Funds

Individual bonds and bond funds are two very different animals. Understanding how bond funds and
individual bonds differ will help you assess which is the best investment option for you. Here are four
factors you should consider:
1.
Return of Principal. Unless there is a default, when an individual bond matures or is called, your
principal is returned. That is not true with bond funds. Bond funds have no obligation to return your
principal. Except for UITs, they have no maturity date. With a bond fund, the value of your investment
fluctuates from day to day. While this is also true of individual bonds trading in the secondary market,
if the price of a bond declines below par, you always have the option of holding the bond until it
matures and collecting the principal.

2.

Income. With most fixed-rate individual bonds, you know exactly how much interest you'll
receive. With bond funds, the interest you receive can fluctuate with changes to the underlying bond
portfolio. Another consideration is that many bond funds pay interest monthly opposed to
semiannually, as is the case with most individual bonds.

3.

Diversification. With a single purchase, a bond fund provides you with instant diversification at a
very low cost. To put together a diversified portfolio of individual bonds, you'll need to purchase
several bonds, and that might cost you $50,000 or more. Most mutual funds only require a minimum
investment of a few thousand dollars.

4.

Liquidity. Virtually all bond funds can be sold easily at anytime at the current fund value (NAV).
The liquidity of individual bonds, on the other hand, can vary considerably depending on the bond. In
addition to taking longer to sell, illiquid bonds may also be more expensive to sell.

Comparing Bonds and Bond Funds

Individual Bonds

Bond Mutual

Closed-End Bond

Funds

Funds

Return of

Principal returned

Principal

at maturity or

back as bonds in

when bond is

UIT mature or are

called

called

Maturity Date

Set maturity date

Principal at risk

None

Principal at risk

Bond UITs

None

Receive principal

UIT liquidated on

Bond ETFs

Principal at risk

None

set date
Income

Usually fixed and

Fluctuating

Fluctuating monthly

Fixed monthly,

Fluctuating

Payments

paid semiannually

monthly

or quarterly

quarterly, or

monthly

(except zero-

payments

payments

semiannual

payments

coupon bonds)
Liquidity

payments

Trade on

Bought and sold

Trade on an

Bought and sold at

Trade on an

secondary market

at net asset

exchange with daily

NAV

exchange with

above or below

value

fluctuation in the

daily fluctuation in

unit price

the unit price

their face value,

but some bonds
can be hard to sell
Redeemable

Redeemable only

By selling shares

By selling shares at

By selling shares

By selling shares

at maturity or

at prevailing NAV

prevailing unit price

at NAV

at prevailing unit

when called
Default Risk

price

Varies by credit

Limited by

Limited by

Limited by

Limited by

quality of bond

diversification

diversification

diversification

diversification

Interest Rate

Exists but declines

Exists and

Because some

Exists and

Exists and

Risk

as bonds near

sensitivity to

closed-end funds

sensitivity to

sensitivity to

maturity

interest rates

are highly

interest rates

interest rates

depends on

leveraged, they can

depends on

depends on

portfolio of

be very sensitive to

portfolio of

portfolio of

holdings

interest rate

holdings

holdings

increases
Expenses

No ongoing

Annual fees; may

Annual fees and

Annual fees

Annual fees

expenses;

have front- or

brokerage

(usually lower than

(usually lower

transaction charge

back-end sales

commissions

mutual fund fees)

than mutual fund

built into price for

charge

and front-end sales

fees) and

charge

brokerage

purchases and
sales
Reinvestment

commissions

No automatic

Automatic

Automatic

Automatic

Automatic

reinvestment

reinvestment

reinvestment option

reinvestment

reinvestment

option

option

option

option available
for most but not
all ETFs

Professionally

No management

Managed

Actively

Actively managed

managed (except

Passively

Most are

managed

passively

index funds)

managed; some
are now actively
managed

Diversification

Need to purchase

Constantly

Constantly

Fixed portfolio of

Constantly

multiple bonds to

changing

changing portfolio

bonds; less

changing portfolio

diversify

portfolio of bonds

of bonds

diversified than

of bonds

many bond mutual

funds, closed-end
funds or ETFs

Before You Invest

Here is our Top 10 list of things to consider before you invest in bonds or bond funds:
1.
Define your objectives. Is your investment objective to have enough money for your child's
college education? Is your goal to live comfortably in retirement? If so, how comfortably? You

probably have multiple goals. Lay them all out and be as precise as you can. Remember: If you don't
know where you're going, you'll never arrive.

2.

Assess your risk profile. Different bonds and bond funds, like stocks and stock funds, carry
different risk profiles. Always know the risks before you invest. It's a good idea to write them down so
they are all in plain sight.

3.

Do your homework. You're off to a good start if you've come this farbut keep going. Read
books and articles about bond investing from the library. Look up information on the Web. Start
following the fixed-income commentary on financial news shows and in newspapers. Familiarize
yourself with bond math. You should also read the bond's offering statement. It's where you will find a
bond's important characteristics, from yield to the bond's call schedule.

4.

If you're considering buying a bond fund, read the prospectus closely. Pay particular
attention to the parts that discuss which bonds are in the fund. For instance, not all bonds in a
government bond fund are government bonds. Also, pay attention to fees. Individual bonds also have
prospectuses, which derive information from a bond's indenture, a legal document that defines the
agreement between bond buyer and bond seller. Ask your broker for a copy of the prospectus or
indenture to read it.

5.

If you're buying individual bonds, locate a firm and broker specializing in bonds. Not all
firms, and not all brokers, know the bond business. Talk to a number of brokers, and find one you are
satisfied with. Make sure your broker knows your objectives and risk tolerance. Check broker
credentials and disciplinary history using FINRA BrokerCheck.

6.

Ask your broker when, and at what price, the bond last traded. This will give you insight into
the bond's liquidity (an illiquid bond may not have traded in days or even weeks) and competitiveness
of the pricing offered by the firm.

7.

Understand all costs associated with buying and selling a bond. Ask upfront how your
brokerage firm and broker are being compensated for the transaction, including commissions, markups or mark-downs. If you're not buying a Treasury bond, it's a good idea to assess whether the
additional return is worth the added risk.

8.

Plan to reinvest your coupons. This allows the power of compounding to work on your
behalf. It's a good idea to establish a "coupon account" before you start receiving coupons, so that
you have a place to save the money and are not tempted to spend it. If you are buying a bond fund,
you don't have to worry about thisthe fund does this for you.

9.

Don't try to time the market. As hard as it is to time the stock market, it's even harder to time
the bond market. Avoid speculating on interest rates. Decisions are too often made on where rates
have been rather than where they are going. Instead, stick to the investment strategy that will best
help you achieve your goals and objectives.

10.

Don't reach for yield. The single biggest mistake bond investors make is reaching for yield after
interest rates have declined. Don't be tempted by higher yields offered by bonds with lower credit
qualities, or be focused only on gains that resulted during the prior period. Yield is one of many
factors an investor should consider when buying a bond. And never forget: With higher yield comes
higher risk.

Learning More about Bonds

Check out these resources to learn more about bonds and bond investing.

SIFMA's website, Investing in Bonds, offers information on corporate, Treasury, municipal and
agency bonds, along with many other categories of information. The site also includes real-time
corporate and municipal bond data.

TreasuryDirect provides educational information, as well as the opportunity to buy Treasuries

online and over the phone.

The Ginnie Mae Investment Center

The Investment Company Institute's (ICI) Research and Statistics area provides information on
bond fund inflows and outflows. Also see ICI's Understanding the Risks of Bond Mutual Funds.

The Federal Reserve Bank of Minneapolis provides a valuable inflation chart and calculator.

FINRAs Market Data Center

NYSE Euronext (NYX)

Learning More about Bonds

Check out these resources to learn more about bonds and bond investing.

SIFMA's website, Investing in Bonds, offers information on corporate, Treasury, municipal and
agency bonds, along with many other categories of information. The site also includes real-time
corporate and municipal bond data.

TreasuryDirect provides educational information, as well as the opportunity to buy Treasuries

online and over the phone.

The Ginnie Mae Investment Center

The Investment Company Institute's (ICI) Research and Statistics area provides information on
bond fund inflows and outflows. Also see ICI's Understanding the Risks of Bond Mutual Funds.

The Federal Reserve Bank of Minneapolis provides a valuable inflation chart and calculator.

FINRAs Market Data Center

NYSE Euronext (NYX)

Glossary
# A B C D E F G H IJ K L M N O P Q R S T U V W X Y Z
401(k)
A 401(k) plan is an employer sponsored retirement savings plan. 401(k)s are largely self-directed: You
decide how much you would like to contribute, and which investments from among those offered by the
plan you would like to invest in. Traditional 401(k)s are funded with money deducted from your pre-tax
salary. Your earnings are tax deferred until you withdraw your money from your account. Roth 401(k)s
are funded with after-tax income, but withdrawals are tax free if you follow the rules.
403(b)
A 403(b) plan, sometimes known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA), is an
employer sponsored retirement savings plan for employees of not-for-profit organizations, such as
colleges, hospitals, foundations and cultural institutions. Some employers offer 403(b) plans as a
supplement torather than a replacement fordefined benefit pensions.

Agency security
Debt security issued or guaranteed by an agency of the federal government or by a governmentsponsored enterprise (GSE). These securities include bonds and other debt instruments. Agency
securities are only backed by the "full faith and credit" of the U.S. government if they are issued or
guaranteed by an agency of the federal government, such as Ginnie Mae. Although GSEs such as
Fannie Mae and Freddie Mac are government-sponsored, they are not government agencies.
Asset allocation
A strategy for maximizing gains while minimizing risks in your investment portfolio. Specifically, asset
allocation means dividing your assets on a percentage basis among different broad categories of
investments, including stocks, bonds and cash.
Asset class
Different categories of investments that provide returns in different ways are sometimes described as
asset classes. Stocks, bonds, cash and cash equivalents, real estate, collectibles and precious metals
are among the primary asset classes.
Average maturity
The average time that a mutual fund's bond holdings will take to be fully payable. Interest rate
fluctuations have a greater impact on the price per share of funds holding bonds with longer average
lives.
Bear market
A bear market is one in which stock and/or bond prices decline over an extended period of time, at times
accompanied by an economic recession, rising inflation or rising interest rates.
Benchmark
A benchmark is a standard against which investment performance is measured. For example, the S&P
(Standard & Poor's) 500 Index, which tracks 500 major U.S. companies, is the standard benchmark for
large-company U.S. stocks and large-company mutual funds. The Barclays Capital Aggregate Bond
Index is a common benchmark for bond funds.
Bond
A debt instrument, also considered a loan, that an investor makes to a corporation, government, federal
agency or other organization (known as an issuer) in which the issuer typically agrees to pay the owner
the amount of the face value of the bond on a future date, and to pay interest at a specified rate at
regular intervals.
Bondholder
Owner of a bond; may be an individual or institution such as a corporation, bank, insurance company or
mutual fund. A bondholder is typically entitled to regular interest payments as due and return of principal
when the bond matures.
Bond rating
A method of evaluating the quality and safety of a bond. This rating is based on an examination of the

issuer's financial strength and the likelihood that it will be able to meet scheduled repayments. Ratings
range from AAA (best) to D (worst). Bonds receiving a rating of BB or below are not considered
investment grade because of the relative potential for issuer default.
Bull market
A bull market is one in which prices rise during a prolonged period of time.
Call
The issuer's right to redeem outstanding bonds before the stated maturity.
Call protection
A feature of some callable bonds that protects the investor from calls for some initial period of time.
Call risk
The risk that a bond will be called prior to its maturity date, causing the bond's principal to be returned
sooner than expected. If the bondholder wishes to reinvest the principal, it usually must be done at a
lower rate than when the bond was originally purchased.
Capital gains tax
Tax assessed on profits you realize from the sale of a capital asset, such as stock, bonds or real estate.
Commission
A fee paid to a broker, as an agent of the customer, for executing a trade based on the number of bonds
traded or the dollar amount of the trade.
Collateralized Mortgage Obligation (CMO)
A bond backed by multiple pools (also called tranches) of mortgage securities or loans.
Corporate bond
A bond issued by a corporation to raise money for capital expenditures, operations and acquisitions.
Convertible bond
A bond with the option to convert into shares of common stock of the same issuer at a pre-established
price.
Coupon
The interest payment made on a bond, usually paid twice a year. A $1,000 bond paying $65 per year has
a $65 coupon, or a coupon rate of 6.5 percent. Bonds that pay no interest are said to have a "zero
coupon." Also called the coupon rate.
Coupon yield
The annual interest rate established when the bond is issued. The same as the coupon rate, it is the
amount of income you collect on a bond, expressed as a percentage of your original investment.

Credit risk
The possibility that the bond's issuer may default on interest payments or not be able to repay the bond's
face value at maturity.
Current yield
The yearly coupon payment divided by the bond's price, stated as a percent. A newly issued $1,000 bond
paying $65 has a current yield of .065, or 6.5 percent. Current yield can fluctuate: If the price of the bond
dropped to $950, the current yield would rise to 6.84 percent.
Debenture
An unsecured bond backed solely by the general credit of the borrower.
Debt security
Any security that represents loaned money that must be repaid to the lender.
Discount
The amount by which a bond's market price is lower than its issuing price (par value). A $1,000 bond
selling at $970 carries a $30 discount.
Diversification
Diversification is an investment strategy for allocating your assets available for investment among
different markets, sectors, industries and securities. The goal is to protect the value of your overall
portfolio by diversifying your investment risk among these different markets, sectors, industries and
securities.
Event risk
The risk that an event will have a negative impact on a bond issuer's ability to pay its creditors.
Face value
The amount the issuer must pay to the bondholder at maturity, also known as par.
Full faith and credit of the U.S. government
A promise by the U.S. government to pay all interest when due and redeem bonds at maturity.
Treasuries, savings bonds and debt securities issued by federal agencies are backed by the "full faith
and credit" of the U.S. government.
Fixed-rate bond
A bond with an interest rate that remains constant or fixed during the life of the bond.
Floating-rate bond
A bond with an interest rate that fluctuates (floats), usually in tandem with a benchmark interest rate
during the life of the bond.

General Obligation bond (GO)

A municipal bond secured by a governmental issuer's "full faith and credit," usually based on taxing
power.
Government-Sponsored Enterprise (GSE)
Enterprises that are chartered by Congress to fulfill a public purpose, but are privately owned and
operated, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). Unlike bonds guaranteed by a government agency such as Ginnie
Mae, those issued by a GSE are not backed by the "full faith and credit" of the U.S. government.
High-yield bond
A bond issued by an issuer that is considered a credit risk by a Nationally Recognized Statistical Rating
Organization, as indicated by a low bond rating (e.g., "Ba" or lower by Moody's Investors Services, or
"BB" or below by Standard & Poor's Corporation). Because of this risk, a high-yield bond generally pays
a higher return (yield) than a bond with an issuer that carries lower default risk. Also known as a "junk"
bond.
Holding period risk
The risk, while you are waiting for your bond to mature (holding it), that a better opportunity will come
around that you may be unable to act upon. The longer the term of your bond, the greater the chance a
more attractive investment opportunity will become available, or that any number of other factors may
occur that negatively impact your investment.
Indenture
A legal document between a bond issuer and a trustee appointed on behalf of all bondholders that
describes all of the features of the bond, the rights of bondholders, and the duties of the issuer and the
trustee. Much of this information is also disclosed in the prospectus or offering statement.
Inflation risk
The risk that a bond's returns may not keep pace with inflation, eroding purchasing power.
Interest rate risk
The risk that a bond's price will fall when interest rates rise.
Investment-grade bond
A bond whose issuer's prompt payment of interest and principal (at maturity) is considered relatively safe
by a nationally recognized statistical rating agency, as indicated by a high bond rating (e.g., "Baa" or
better by Moody's Investors Service, or "BBB" or better by Standard & Poor's Corporation).
Junk bond
Another name for a high-yield bond.
Liquidity risk
The risk of not being able to execute a trade at the time you desire, or being forced to accept a
significantly discounted price of a bond at the time you desire to sell.

Maturity date
A maturity date is the date when the principal amount of a bond, note or other debt instrument is typically
repaid to the investor along with the final interest payment.
Mortgage-backed security
A security that is secured by home and other real estate loans.
Municipal bond
A bond issued by states, cities, counties and towns to fund public capital projects like roads and schools,
as well as operating budgets. These bonds are typically exempt from federal taxation and, for investors
who reside in the state where the bond is issued, from state and local taxes, too.
Non-callable bond
A feature of some bonds that stipulates the bond cannot be redeemed (called) before its maturity date.
Also called a "bullet."
Non investment-grade bond
A bond whose issuer's prompt payment of interest and principal (at maturity) is considered risky by a
nationally recognized statistical rating agency, as indicated by a lower bond rating (e.g., "Ba" or lower by
Moody's Investors Service, or "BB" or lower by Standard & Poor's Corporation).
Note
A short- to medium-term loan that represents a promise to pay a specific amount of money. A note may
be secured by future revenues, such as taxes. Treasury notes are issued in maturities of two, three, five
and 10 years.
Opportunity risk
The risk that a better investment opportunity will come around that you may be unable to act upon
because of a current investment. Generally, the longer the holding period of a bond, the greater the
opportunity risk.
Over-the-counter (OTC) securities
Securities that are not traded on a national exchange. For such securities, broker-dealers negotiate
directly with one another over computer networks and by phone.
Par value
An amount equal to the nominal or face value of a security. A bond selling at par, for instance, is worth
the same dollar amount at which it was issued, or at which it will be redeemed at maturitytypically
$1,000 per bond.
Phantom income
Interest reportable to the IRS that does not generate income, such as interest from a zero-coupon bond.

Prepayment risk
The possibility that the issuer will call a bond and repay the principal investment to the bondholder prior
to the bond's maturity date.
Premium
The amount by which a bond's market value exceeds its issuing price (par value). A $1,000 bond selling
at $1,063 carries a $63 premium.
Primary market
The market in which new issues of stock or bonds are priced and sold, with proceeds going to the entity
issuing the security. From there, the security begins trading publicly in the secondary market.
Principal
1.
For investments, principal is the original amount of money invested, separate from any
associated interest, dividends or capital gains. For example, the price you paid for a bond with a
$1,000 face value the time of purchase is your principal. Once purchased, the value of your bond
holdings can fluctuate, meaning you can see an increase or decrease to your principal.
2.
A brokerage firm that executes trades for its own accounts at net prices (prices that include either
a mark-up or mark-down).
Prospectus
A formal written offer to sell securities that sets forth the plan for a proposed business enterprise, or the
facts concerning an existing business enterprise that an investor needs to make an informed decision.
Real rate of return
The rate of return minus the rate of inflation. For example, if you are earning 6 percent interest on a bond
in a period when inflation is running at 2 percent, your real rate of return is 4 percent.
Revenue bond
A type of municipal security backed solely by fees or other revenue generated or collected by a facility,
such as tolls from a bridge or road, or leasing fees. The creditworthiness of revenue bonds tends to rest
on the bond's debt service coverage ratiothe relationship between revenue coming in and the cost of
paying interest on the debt.
Risk
The possibility that an investment will lose, or not gain, value.
Risk tolerance
A person's capacity to endure market price swings in an investment.
Savings bond
U.S. government bond issued in face denominations ranging from $25 to $10,000.

Secondary market
Markets where securities are bought and sold subsequent to their original issuance.
STRIPS
Short for "Separate Trading of Registered Interest and Principal of Securities." STRIPS are Treasury
Department-sanctioned bonds in which a broker-dealer is allowed to strip out the coupon, leaving a zerocoupon security.
TIPS
U.S. government securities designed to protect investors and the future value of their fixed-income
investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the
value of the bond's principal is adjusted upward to keep pace with inflation.
Treasury
Negotiable debt obligations that include notes, bonds and bills issued by the U.S. government at various
schedules and maturities. Treasuries are backed by the "full faith and credit" of the U.S. government.
Treasury bill
Non-interest bearing (zero-coupon) debt security issued by the U.S. government with a maturity of four,
13 or 26 weeks. Also called a T-bill.
Treasury bond
Long-term debt security issued by the U.S. government with a maturity of 10 to 30 years, paying a fixed
interest rate semiannually.
Treasury note
Medium-term debt security issued by the U.S. government that has a maturity of two to 10 years.
Total return
All money earned on a bond or bond fund from annual interest and market gain or loss, if any, including
the deduction of sales charges and/or commissions.
Yield
The return earned on a bond, expressed as an annual percentage rate.
Yield Curve
A yield curve is a graph showing the relationship between yield (on the y- or vertical axis) and maturity
(on the x- or horizontal axis) among bonds of different maturities and of the same credit quality.
Yield-to-Call (YTC)
The rate of return you receive if you hold the bond to its call date and the security is redeemed at its call
price. YTC assumes interest payments are reinvested at the yield-to-call date.

Yield-to-Maturity (YTM)
The rate of return you receive if you hold a bond to maturity and reinvest all of the interest payments at
the YTM rate. It is calculated by taking into account the total amount of interest you will receive over time,
your purchase price (the amount of capital you invested), the face amount (or amount you will be paid
when the issuer redeems the bond), the time between interest payments and the time remaining until the
bond matures.
Yield-to-Worst (YTW)
The lower yield of yield-to-call and yield-to-maturity. Investors of callable bonds should always do the
comparison to determine a bond's most conservative potential return.
Yield reflecting broker compensation
Yield adjusted for the amount of the mark-up or commission (when you purchase) or mark-down or
commission (when you sell) and other fees or charges that you are charged by your broker for its
services.
Zero
Short for zero-coupon bond.
Zero-coupon bond
A type of bond that does not pay a coupon. Zero-coupon bonds are purchased by the investor at a
discount to the bond's face value (e.g., less than $1,000), and redeemed for the face value when the
bond matures.

STOCKS

Stocks
Introduction
When you invest in stock, you buy ownership shares in a companyalso known as equity shares. Your return
on investment, or what you get back in relation to what you put in, depends on the success or failure of that
company. If the company does well and makes money from the products or services it sells, you expect to
benefit from that success.
There are two main ways to make money with stocks:

1.

Dividends. When publicly owned companies are profitable, they can choose to distribute some of
those earnings to shareholders by paying a dividend. You can either take the dividends in cash or
reinvest them to purchase more shares in the company. Many retired investors focus on stocks that
generate regular dividend income to replace income they no longer receive from their jobs. Stocks that
pay a higher than average dividend are sometimes referred to as "income stocks."

2.

Capital gains. Stocks are bought and sold constantly throughout each trading day, and their prices
change all the time. When a stock price goes higher than what you paid to buy it, you can sell your
shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower
price than you paid to buy it, you've incurred a capital loss.

Both dividends and capital gains depend on the fortunes of the companydividends as a result of the
company's earnings and capital gains based on investor demand for the stock. Demand normally reflects the
prospects for the company's future performance. Strong demandthe result of many investors wanting to buy
a particular stocktends to result in an increase in the stock's share price. On the other hand, if the company
isn't profitable or if investors are selling rather than buying its stock, your shares may be worth less than you
paid for them.
The performance of an individual stock is also affected by what's happening in the stock market in general,
which is in turn affected by the economy as a whole. For example, if interest rates go up and you think you can
make more money with bonds than you can with stock, you might sell off stock and use that money to buy
bonds. If many investors feel the same way, the stock market as a whole is likely to drop in value, which in turn
may affect the value of the investments you hold. Other factors, such as political uncertainty at home or abroad,
energy or weather problems, or soaring corporate profits, also influence market performance.
Howeverand this is an important element of investingat a certain point, stock prices will be low enough to
attract investors again. If you and others begin to buy, stock prices tend to rise, offering the potential for making
a profit. That expectation may breathe new life into the stock market as more people invest.
This cyclical patternspecifically, the pattern of strength and weakness in the stock market and the majority of
stocks that trade in the stock marketrecurs continually, though the schedule isn't predictable. Sometimes, the
market moves from strength to weakness and back to strength in only a few months. Other times, this
movement, which is known as a full market cycle, takes years.
At the same time that the stock market is experiencing ups and downs, the bond market is fluctuating as well.
That's why asset allocation, or including different types of investments in your portfolio, is such an important
strategy: In many cases, the bond market is up when the stock market is down and vice versa. Your goal as an
investor is to be invested in several categories of investments at the same time, so that some of your money
will be in the category that's doing well at any given time.

Common and Preferred Stock

You can buy two kinds of stock. All publicly traded companies issue common stock. Some companies also
issue preferred stock, which exposes you to somewhat less risk of losing money, but also provides less
potential for total return. Your total return includes any income you receive from an investment plus any change
in its value.

If you hold common stock you're in a position to share in the company's success or feel the lack of it. The share
price rises and falls all the timesometimes by just a few cents and sometimes by several dollarsreflecting
investor demand and the state of the markets. There are no price ceilings, so it's possible for shares to double
or triple or more over timethough they could also lose value. The issuing company may pay dividends, but it
isn't required to do so. If it does, the amount of the dividend isn't guaranteed, and it could be cut or eliminated
altogetherthough companies may be reluctant to do either if they believe it will send a bad message about
the company's financial health.
Holders of preferred stock, on the other hand, are usually guaranteed a dividend payment and their dividends
are always paid out before dividends on common stock. So if you're investing mostly for incomein this case,
dividendspreferred stock may be attractive. But, unlike common stock dividends, which may increase if the
company's profit rises, preferred dividends are fixed. In addition, the price of preferred stock doesn't move as
much as common stock prices. This means that while preferred stock doesn't lose much value even during a
downturn in the stock market, it doesn't increase much either, even if the price of the common stock soars. So if
you're looking for capital gains, owning preferred stock may limit your potential profit.
Another point of difference between common stock and preferred stock has to do with what happens if the
company fails. In that event, there's a priority list for a company's obligations, and obligations to preferred
stockholders must be met before those to common stockholders. On the other hand, preferred stockholders are
lower on the list of investors to be reimbursed than bondholders are.

Classes of Stock
In addition to the choice of common or preferred stock, certain companies may offer a choice of publicly traded
share classes, typically designated by letters of the alphabetoften A and B. For example, a company may
offer a separate class of stock for one of its divisions which itself was perhaps a well-known, formerly
independent company that has been acquired. In other cases, a company may issue different share classes
that trade at different prices and have different dividend policies.
When a company has dual share classes, though, it's more common for one share class to be publicly traded
and the other to be nontraded. Nontraded shares are generally reserved for company founders or current
management. There are often restrictions on selling these shares, and they tend to have what's known as
super voting power. This makes it possible for insiders to own less than half of the total shares of a company
but control the outcome of issues that are put to a shareholder vote, such as a decision to sell the company.

Understanding Various Ways Stocks Are Described

In addition to the distinctions a company might establish for its sharessuch as common or preferred
industry experts often group stocks generally into categories, sometimes called subclasses. Common
subclasses, explained in greater detail below, focus on the company's size, type, performance during market
cycles, and potential for short- and long-term growth.
Each subclass has its own characteristics and is subject to specific external pressures that affect the
performance of the stocks within that subclass at any given time. Since each individual stock fits into one or
more subclasses, its behavior is subject to a variety of factors.

Market Capitalization
You'll frequently hear companies referred to as large-cap, mid-cap, and small-cap. These descriptors refer to
market capitalization, also known as market cap and sometimes shortened to just capitalization. Market cap is
one measure of a company's size. More specifically, it's the dollar value of the company, calculated by
multiplying the number of outstanding shares by the current market price.
There are no fixed cutoff points for large-, mid-, or small-cap companies, but you may see a small-cap
company valued at less than $1 billion, mid-cap companies between $1 billion and $5 billion, and large-cap
companies over $5 billionor the numbers may be twice those amounts. You might also hear about micro-cap
companies, which are even smaller than other small-cap companies.
Larger companies tend to be less vulnerable to the ups and downs of the economy than smaller onesbut
even the most venerable company can fail. Larger companies typically have larger financial reserves, and can
therefore absorb losses more easily and bounce back more quickly from a bad year. At the same time, smaller
companies may have greater potential for fast growth in economic boom times than larger companies. Even so,
this generalization is no guarantee that any particular large-cap company will weather a downturn well, or that
any particular small-cap company will or won't thrive.

Industry and Sector

Companies are subdivided by industry or sector. A sector is a large section of the economy, such as industrial
companies, utility companies, or financial companies. Industries, which are more numerous, are part of a
specific sector. For example, banks are an industry within the financial sector.
Frequently, events in the economy or the business environment can affect an entire industry. For example, it's
possible that high gas prices could lower the profits of transportation and delivery companies. A new rule
changing the review process for prescription drugs could affect the profitability of all pharmaceutical
companies.
Sometimes an entire industry might be in the midst of an exciting period of innovation and expansion, and
becomes popular with investors. Other times that same industry could be stagnant and have little investor
appeal. Like the stock market as a whole, sectors and industries tend to go through cycles, providing strong
performance in some periods and disappointing performance in others.
Part of creating and maintaining a strong stock portfolio is evaluating which sectors and industries you should
be invested in at any given time. Having made that decision, you should always evaluate individual companies
within a sector or industry you've identified to focus on the ones that seem to be the best investment choices.

Defensive and Cyclical

Stocks can also be subdivided into defensive and cyclical stocks. The difference is in the way their profits, and
therefore their stock prices, tend to respond to the relative strength or weakness of the economy as a whole.
Defensive stocks are in industries that offer products and services that people need, regardless of how well the
overall economy is doing. For example, most people, even in hard times, will continue filling their medical
prescriptions, using electricity, and buying groceries. The continuing demand for these necessities can keep
certain industries strong even during a weak economic cycle.

In contrast, some industries, such as travel and luxury goods, are very sensitive to economic up-and-downs.
The stock of companies in these industries, known as cyclicals, may suffer decreased profits and tend to lose
market value in times of economic hardship, as people try to cut down on unnecessary expenses. But their
share prices can rebound sharply when the economy gains strength, people have more discretionary income to
spend, and their profits rise enough to create renewed investor interest.

Growth and Value

A common investment strategy for picking stocks is to focus on either growth or value stocks, or to seek a
mixture of the two since their returns tend to follow a cycle of strength and weakness.
Growth stocks, as the name implies, are issued by companies that are expanding, sometimes quite quickly but
in other cases over a longer period of time. Typically, these are young companies in fairly new industries that
are rapidly expanding.
Growth stocks aren't always new companies, though. They can also be companies that have been around for
some time but are poised for expansion, which could be due to any number of things, such as technological
advances, a shift in strategy, movement into new markets, acquisitions, and so on.
Because growth companies often receive intense media and investor attention, their stock prices may be
higher than their current profits seem to warrant. That's because investors are buying the stock based on
potential for future earnings, not on a history of past results. If the stock fulfills expectations, even investors who
pay high prices may realize a profit. Since companies may take big risks to expand, however, growth stocks
may be very volatile, or subject to rapid price swings. For example, a company's new products may not be a
hit, there may be unforeseen difficulty doing business in new countries, or the company may find itself saddled
with major debt in a period of rising interest rates. As always with investing, the greater the potential for an
outstanding return, the higher the risk of loss.
When a growth stock investment provides a positive return, it's usually as a result of price improvementthe
stock price moves up from where the investor originally bought itnot because of dividends. Indeed, a key
feature of most growth stocks is an absence of dividend payments to investors. Instead, company managers
tend to plow gains directly back into the company.
Value stocks, in contrast, are solid investments selling at what seem to be low prices given their history and
market share. If you buy a value stock, it's because you believe that it's worth more than its current price. You
might look for value in older, more established industries, which tend not to get as much press as newer
industries. One of the big risks in buying value stocks, also known as undervalued stocks, is that it's possible
that investors are avoiding a company and its stock for good reasons, and that the price is a fairer reflection of
its value than you think.
On the other hand, if you deliberately buy stocks that are out of fashion and sell stocks that other investors are
buyingin other words, you invest against the prevailing opinionyou're considered a contrarian investor.
There can be rewards to this style of investing, since by definition a contrarian investor buys stocks at low
prices and sells them at high ones. However, contrarian investing requires considerable experience and a
strong tolerance for risk, since it may involve buying the stocks of companies that are in trouble and selling

stocks of companies that other investors are favoring. Being a contrarian also takes patience, since the
turnaround you expect may take a long time.

Volatility
If you've seen the jagged lines on charts tracking stock prices, you know that prices fluctuate throughout the
day, week, month, and year, as demand goes up and down in the markets. You'll see short-term fluctuations as
the stock's price moves within a certain price range, and longer-term trends over months and years, in which
that short-term price range itself moves up or down. The size and frequency of these short-term fluctuations are
known as the stock's volatility.
If a stock has a relatively large price range over a short time period, it is considered highly volatile and may
expose you to increased risk of loss, especially if you sell for any reason when the price is down. Though there
are exceptions, growth stocks tend to be more volatile than value stocks.
In contrast, if the range of prices is relatively narrow over a short time period, a stock is considered less volatile
and normally exposes you to less investment risk. But reduced risk also means reduced potential for
substantial short-term return since the stock price is unlikely to increase very much in that time frame.
Stocks may become more or less volatile over time. One example might be a newer stock that had formerly
seen big price swings, but becomes less volatile as the company grows and establishes a track record. Another
example might be a stock with a traditionally stable price that becomes extremely volatile following unfavorable
or favorable news reports, which trigger a rash of buying and selling.

Stock Splits
When a stock price gets very high, companies may decide to split the stock to bring its price down. One reason
to do this is that a very high stock price can intimidate investors who fear there is little room for growth, or what
is known as price appreciation.
Here's how a stock split works: Suppose a stock trading at $150 a share is split 3-for-1. If you owned 100
shares worth $15,000 before the split, you would hold 300 shares valued at $50 each after the split, so that
your investment would still worth $15,000. More investors may become interested in the stock at the lower
price, so there's always the possibility that your newly split shares will rise again in price due to increased
demand. In fact, it may move back toward the pre-split pricethough, of course, there's no guarantee that it
will.
You may also own stock that goes through a reverse split, though this type of split is less common especially
among seasoned companies that trade on one of the major U.S. stock markets, including the NYSE, The
NASDAQ Stock Market, or the Amex. In this case, a company with very low-priced stock reduces the total
number of shares to increase the per-share price.
For example, in a reverse split you might receive one new share for every five old shares. If the price-per-share
had been $1, each new share would be worth $5. Companies may do reverse splits to maintain their listing on
a stock market that has a minimum per-share price, or to appeal to certain institutional investors who may not
buy stock priced below a certain amount. In either of those casesindeed if reverse splits are announced or

actually occuryou'll want to proceed with caution. Reverse splits tend to go hand in hand with low priced, high
risk stocks.

Evaluating a Stock
When you buy a stock, you're buying part ownership of a company, so the questions to ask as you select
among the stocks you're considering are the same questions you'd ask if you were buying the whole company:
What are the company's products?
Are they in demand and of high quality?
Is the industry as a whole doing well?
How has the company performed in the past?
Are talented, experienced managers in charge?
Are operating costs low or too high?
Is the company in heavy debt?
What are the obstacles and challenges the company faces?
Is the stock worth the current price?
Because each company is a different size and has issued a different number of shares, you need a way to
compare the value of different stocks. A common and quick way to do this is to look at the stock's earnings. All
publicly traded companies report earnings to the Securities and Exchange Commission on a quarterly basis in
an unaudited filing known as the 10-Q, and annually in an audited filing known as the 10-K.
If you check those reports, the company's annual report, or its Web site, you'll find its current earnings-pershare, or EPS. That ratio is calculated by dividing the company's total earnings by the number of shares. You
can then use this per-share number to compare the results of companies of different sizes. EPS is one
indication of a company's current strength.
You can divide the current price of a stock by its EPS to get the price-to-earnings ratio, or P/E multiple, the
most commonly quoted measure of stock value. In a nutshell, P/E tells you how much investors are paying for
a dollar of a company's earnings. For example, if Company A has a P/E of 25, and Company B has a P/E of 20,
investors are paying more for each dollar earned by Company A than for each dollar earned by Company B.
There's no perfect P/E, though there is a market average at any given time. Over the long term that number
has been about 15, though higher in some periods and lower in others. Value investors tend look for stocks
with relatively low P/E ratiosbelow the current averagewhile growth investors often buy stocks with higher
than average P/E ratios.
While P/E can be a revealing indicator, it shouldn't be your only measure for evaluating a stock. For example,
there are times you might consider a stock with a P/E that's higher than average for its industry if you have
reason to be optimistic about its future prospects. Remember, though, that when a stock has an unusually high
P/E, the company will have to generate substantially higher earnings in the future to make it worth the price. At
the other end of the scale, a low P/E may be a sign that significant price appreciation is possible or that a
company is in serious financial trouble. That's one of the determinations you'll want to make before you buy.
A P/E ratio can only be as useful as the earnings numbers it's based on. While there are standards for reporting
earnings, and a company's financial reports are audited, there may still be a lack of consistency across
earnings reports. You've probably seen stories in the financial press about companies restating earnings. This
happens when an accounting error or other discrepancy comes to light, and a company must reissue reports

for past periods. Inaccurate or inconsistent earnings statements may make P/E a less reliable measure of stock
value.
Even though P/E is the most widely quoted measure of stock value, it's not the only one. You'll also see stock
analysts discussing measures such as ROA (return on assets), ROE (return on equity), and so on. While all of
these acronyms may seem confusing at first, you may find, as you get to know them, that they can help answer
some of your questions about a company, such as how efficient it is, how much debt it's carrying, and so on.
One way to learn more about individual stocks is through professional stock research. The brokerage firm
where you have your account may provide research from its own analysts and perhaps from outside sources.
You can also find independent research from analysts who aren't affiliated with a brokerage firm, as well as
consensus reports that bring together opinions from a variety of analysts. Some of this research is free, while
other research comes with a price tag.
In the past, there have been conflicts of interest at brokerage firms that provide investment banking services to
public companies, since analysts may sometimes have felt pressure to review those stocks positively. However,
brokerage firms are required to establish strict separations between their investment banking and stock
analysis departments to comply with regulations designed to minimize any such potential conflicts of interests.

Buying and Selling Stock

To buy and sell stock, you usually need to have an account at a brokerage firm, also known as a broker-dealer,
and give orders to a stockbroker at the firm who will execute those instructions on your behalf, or online, where
the firm's technology systems route your order to the appropriate market or system for execution. The kind of
firm you use will determine how you convey your orders, what types of services you have access to, and what
fees you pay to trade your stocks. In general, the more services the firm offers, the more you'll pay for each
transaction. Brokerage firms may also charge fees to maintain your account.
Full-service brokerage firms provide research as well as trade executions and may offer customized portfolio
management, investment advice, financial planning, banking privileges, and other services. Discount firms offer
fewer services but, as their name implies, generally charge less to execute the orders you place. The trick is to
find the balance that's right for you. On the one hand, you don't want fees to cut into your returns, but on the
other hand, you may benefit from more guidance. You'll want to check what effect the amount you have to
investor what are known as your investable assetswill have on the level of service you receive and the
prices you pay.
You can place buy and sell orders over the phone with your broker or you can trade stocks online. Many firms
offer full account access and trading through their Web sites at lower prices than they charge for phone orders.
If you do trade online, it's important to be wary of trading too much, simply because it's so easy to place the
trade. You should consider your decisions carefully, taking into account the fees and taxes as well as the
impact on the balance of assets in your portfolio, before you place an order.
There are ways to buy stock directly through certain companies without using a broker. For example, if you
used a broker to purchase a share of stock in a company that offers a dividend reinvestment plan, or DRIP, you
can choose to buy additional shares through that plan. DRIPs allow you to automatically reinvest your
dividends and periodically write checks to buy more stock. Some companies also offer direct purchase plans,
or DPPs, that allow you to buy shares directly from the issuer at any time.

DRIPs and DPPs are usually administered for the company by a third party known as a shareholder services
company or stock transfer agent that can also handle the sale of your shares. Transaction fees for DRIP and
DPP orders tend to be substantially less than brokerage fees.

Trading vs. Buy-and-Hold

The goal of most investors generally is to buy low and sell high. This can result in two quite different
approaches to equity investing.
One approach is described as "trading." Trading involves following the short-term price fluctuations of different
stocks closely and then trying to buy low and sell high. Traders usually decide ahead of time the percentage
increase they're looking for before you sell (or decrease before they buy).
While trading has tremendous potential for immediate rewards, it also involves a fair share of risk because a
stock may not recover from a downswing within the time frame you'd likeand may in fact drop further in price.
In addition, frequent trading can be expensive, since every time you buy and sell, you may pay broker's fees for
the transaction. Also, if you sell a stock that you haven't held for a year or more, any profits you make are taxed
at the same rate as your regular income, not at your lower tax rate for long-term capital gains.
Be aware that trading should not be confused with "day trading," which is the rapid buying and selling of stock
to capitalize on small price changes. Day trading can be extremely risky, especially if you attempt to day trade
using borrowed money. Individual investors frequently lose money by trying to use this approach.
A very different investing strategycalled buy-and-holdinvolves keeping an investment over an extended
period, anticipating that the price will rise over time. While buy-and-hold reduces the money you pay in
transaction fees and short-term capital gains taxes, it requires patience and careful decision-making. As a buyand-hold investor, you generally choose stocks based on a company's long-term business prospects. Increases
in the stock price over years tend to be based less on the volatile nature of the market's changing demands
and more on what's known as the company's fundamentals, such as its earnings and sales, the expertise and
vision of its management, the fortunes of its industry, and its position in that industry.
Buy-and-hold investors still need to take price fluctuations into account, and they must pay attention to the
stock's ongoing performance. Naturally, the price at which you buy a stock directly affects the potential profits
you'll make from its sale. So it makes sense to buy the stock at a price you believe is reasonable. While you
hold the stock, it's also important to watch for signs that your investment isn't going the direction you planned
for example, if the company regularly misses its earnings targets, or if developments in the industry turn
bleaker.
Sometimes you'll decide, after reviewing the company's fundamentals, that it's worthwhile to ride out a slump in
price and wait for a stock to recover. Other times, you may decide you'll have better returns if you sell your
holding and invest elsewhere. Either way, it's important to stay on top of the stocks you own by paying attention
to news that could affect their value.

Advanced Short-Term Trading

There are a number of ways that some experienced investors seek increased returns by taking on more risk.

Buying on Margin
When you buy stocks on margin, you borrow part of the cost of the investment from your broker, in the hopes of
increasing your potential returns. To use this approach, you set up what's known as a margin account, which
typically requires you to deposit cash or qualified investments worth at least $2,000. Then when you invest, you
borrow up to half the cost of the stock from your broker and you pay for the rest. In this way, you can buy and
sell more stock than you could without borrowing, which is a way to leverage your investment.
If the price goes up and you sell the stock, you pay your broker back, plus interest, and you get to keep the
profits. However, if the price drops, you may have to wait to sell the stock at the price you want, and in the
meantime, you're paying interest on the amount you've borrowed. If the price drops far enough, your broker will
require you to add money or securities to your margin account to bring it up to the required level. The required
level is based on the ratio of your cash and qualified investments to the amount you borrowed from your broker
in your account. If you can't add enough money, your broker can sell off the investments in that account to
repay what you've borrowed, which invariably means that you'll lose money on the deal.

Short Selling
Short selling is a way to profit from a price drop in a company's stock. However, it involves more risk than just
buying a stock, which is sometimes described as having a long position, or owning the stock long. To sell a
stock short, you borrow shares from your broker and sell them at their current market price. If that price falls, as
you expect it to, you buy an equal number of shares at a new, lower price to return to your broker. If the price
has dropped enough to offset transaction fees and the interest you paid on the borrowed shares, you may
pocket a profit. This is a risky strategy, however, because you must still re-buy the shares and return them to
your broker. If you must re-buy the shares at a price that's the same as or higher than the price at which you
sold the borrowed shares, after accounting for transaction costs and interest, you will lose money.
Because short selling is in essence the sale of stocks you don't own, there are strict margin requirements
associated with this strategy, and you must set up a margin account to conduct these transactions. The margin
money is used as collateral for the short sale, helping to insure that the borrowed shares will be returned to the
lender down the roa

Bank Products
For many people, the first financial institution they deal with, and the one they use most often, is a bank or
credit union. That's because banks and credit unions provide a safe and convenient way to pay your bills and
accumulate savings, as well as other services that can help you to manage your money.
Banks offer two main products:
1.

Transaction accounts, better known as checking accounts, which allow you to transfer money by check
or electronic payment to a person or organization that you designate as payee; and

2.

Deposit accounts, which include savings accounts and money market accounts, which pay interest
on your money in those accounts.

Deposit accounts are a good place for funds that you want to be safe, liquid and easy to get tosuch as
savings for a down payment, or a cushion for unexpected expenses like car repairs or emergency medical
expenses. And if you're setting aside money for future financial goals with a known deadline, you can consider
another type of savings product called a certificate of deposit (CD).

Federal Insurance
The money you put in a bank account is insured by the Federal Deposit Insurance Corporation (FDIC), an
independent agency of the U.S. government. There's comparable protection for credit union deposits from the
National Credit Union Share Insurance Fund. With this protection, your deposits are secure up to the maximum
coverage that Congress has approved, even if your bank or credit union goes out of business. This coverage
applies separately to each bank where you have accounts.
The exact amount of insurance at each bank depends on two factorsthe kinds of accounts you have and the
way those accounts are registered:
Single accounts: Your total deposits in all the checking and savings accounts you own solely in

your own name are currently insured up to $250,000. This limit might change at the end of 2009.
Joint accounts: Your total share of all the checking and savings accounts you own jointly with

others is currently insured up to $250,000. This limit might change at the end of 2009.
Self-directed retirement accounts (such as IRAs): The balances in your self-directed retirement

accounts are insured up to $250,000, provided that the money is in certificates of deposit or other
bank accounts.
Revocable trust accounts (including payable-on-death accounts and living trust accounts): Each
account that names a different beneficiary is insured up to $250,000.

Let's assume, for example, that you had the following accounts at one bank:
$5,000 in a checking account plus $245,000 in various savings accounts held in your name
$200,000 in a savings account that you own jointly with another person
$250,000 in certificates of deposit in an IRA
$200,000 in two payable-on-death account with different beneficiaries
According to the FDIC insurance rules, all of those deposits would be insured fully by the FDIC since each
account is within limits of the coverage. In the case of the joint savings account, the insurance coverage would
be shared by your co-owner, with each of you being eligible for $250,000 insurance.
Suppose, however that the only money you had in a particular bank was a certificate of deposit valued at
$300,000, and you were the sole owner. In that case, $250,000 of that amount would be covered, and $50,000
would be uninsured.

What FDIC Insurance Doesn't Cover

In contrast to these bank products, securities investments such as stock, bonds, and the mutual funds that
invest in them are not insured or guaranteed by the FDIC. They could lose value even if you hold them in an
account, such as an IRA, that you open with your bank. That's true even if the bank's name is used in the name

of investment, such as Bank X Growth Stock Fund. Insurance company products that a bank sells, including life
insurance and annuities, aren't covered by the FDIC either.

Basic Savings
Bank savings accounts have traditionally been one of the simplest and most convenient ways to save. These
accounts typically have the lowest minimum deposit requirements and the fewest withdrawal restrictions. But
they often pay the lowest interest rates of any of the savings alternatives. However, when banks are competing
for your deposits, they may offer substantially higher interest or other benefits for opening a savings account.
Traditional savings accounts used to be called passbook savings accounts, since tellers would record your
deposits and add the interest you'd earned in a small booklet called your passbook. These days, electronic
records make passbooks unnecessary. But some banks still offer old-fashioned passbook accounts, especially
for children's savings accounts.

Your Savings Account Interest Payments

Most savings accounts pay compound interest, which means that your earnings are added to the balance to
create a larger base on which future interest is paid. The bank will tell you whether the interest compounds
daily, monthly, or on some other schedule, and when the interest is credited to your account. The more
frequently it compounds, the faster your earnings will accumulatethough with small balances the increases
won't be very dramatic. You generally begin to earn interest as soon as the money goes into your account, and
that interest continues to accrue until you withdraw.
The bank will also tell you the basic interest rate and the annual percentage yield (APY). The APY is larger than
the basic, or nominal, rate since it takes into account the impact of compounding. Banks often advertise the
APY since it more accurately reflects the amount of interest the account will actually pay, and it makes the
savings account a more attractive place to park your money.
Online banks may offer higher interest rates than more traditional brick-and-mortar banks. That's because
online banks tend to have lower overhead, and can pass their reduced costs onto consumers in the form of
increased earnings rates. Before deciding on a savings account, it pays to compare interest rates, along with
other features, such as convenience of making deposits and withdrawals. Even a small difference in the rate
can result in a substantial difference in interest over time, depending upon the amount you put into the account.

Other Savings Account Features

With a basic savings account, you can make as many deposits as you like, whenever you like. And you can
usually withdraw as much as you like when you need the money. However, some banks may require minimum
opening balances for basic savings accounts, and some banks charge fees if your balance falls below that
minimum. Other banks don't have minimum balance requirements, so if your savings balance tends to be low,
you may want to consider these fees in choosing a bank account.
You can also ask if the bank offers low-cost savings accounts. Many banks offer more flexible alternatives for
children, college students, and senior citizens, and for people whose income falls below certain limits. But the
way these accounts work vary from banks to bank.

One thing you can't do with a basic savings account is transfer money to another person or institution, so you
can't pay bills from your savings account. But you can generally transfer funds from your savings to your
checking account electronically, or withdraw funds from one of your savings account and deposit them in
another. You should be aware of Federal Reserve Regulation D, though, which limits you to six transfers from
your savings account in any four-week period, whether these transfers are made electronically, automatically,
or by phone.

Emergency Funds
It's a good idea to have a separate savings account to serve as your emergency fund. Most experts agree
that's important to set aside enough money to cover your living expenses for three to six months in an account
you use exclusively for this purpose. This money would come in handy, for example, if you were to stop earning
income temporarily, or if you were faced with unexpected events, such as big medical bills, or any other
expense that could arise without warning. Without savings, you might need to rely on credit cards and other
borrowing to pay for emergencies, which could result in serious debt.

Money Market Accounts and Money Market Mutual Funds

Money market accounts are similar to savings accounts, but may pay higher interest rates. However, they
tend to have higher balance requirements than savings accounts, and different interest rates may apply to
different account balances. For example, there may be one rate for balances below $10,000, a higher rate for
balances between $10,000 and $25,000, and an even higher rate for $25,000 and above. In addition, you may
need a larger deposit to open a money market account.
Unlike traditional savings accounts, money market accounts let you write a limited number of checks each
month, in essence combining features of savings and checking accounts. The ceiling is usually three checks
another of the restrictions imposed by Federal Reserve Regulation D. If you exceed the limit, the bank won't
process any new transactions until the next period. However, you can make all the withdrawals you want by
visiting a bank branch office in person, and you can deposit that money into your checking account without
penalty.
You may want to use a money market account for a portion your emergency fund, or to park money you intend
to invest until you've accumulated enough to make a particular purchase.
Money market mutual funds are similar to money market accounts in some ways. They typically pay interest
at about the same rate and many offer check-writing privileges. One advantage is that there's usually no limit
on the number of checks you can write each month. However, any check you write against the account may
have to be for at least the required minimum, such as $500. One drawback is that money market funds,
unlike money market accounts, are not FDIC insured, although some offer their own insurance. While fund
companies try to keep their money market share price stable at $1 a share, there is the possibility you could
lose some of your principal.

Certificates of Deposit (CDs)

Certificates of deposit (CDs) are time deposits. When you choose a CD, the bank accepts your deposit for a
fixed termusually a preset period from six months to five yearsand pays you interest until maturity. At the
end of the term you can cash in your CD for the principal plus the interest you've earned, or roll your account

balance over to a new CD. But you must tell the bank what you've decided before the CD matures. Otherwise
the bank may automatically roll over your CD to a new CD with the same term at the current interest rate. And
you might earn a better interest rate with a CD that has a different term, or one offered by a different bank.
CDs are less liquid than savings accounts. You can't add to or withdraw from them during the term. Instead, to
buy a CD, you need to deposit the full amount all at once. If you cash in your CD before it matures, you'll
usually pay a penalty, typically forfeiting some of the interest you've earned. To make up for the inconvenience
of tying up your money, CDs typically pay higher interest than savings or money market accounts at the same
bank, with the highest rates for the longest termsthough there are exceptions to this pattern. Like other
savings accounts, bank CDs are insured by the FDIC, with your CD account balances counting toward your
total insured amount.

CDs for Different Interest Rate Environments

In the past, each CD paid a fixed rate of interest over its term. But today you can also find variable rate CDs,
sometimes called market rate CDs. With these accounts, the interest rate may rise and fall with changing
market rates or be readjusted on a specific schedule. If the current rate is low, it may make sense to purchase
a variable CD. That way, if interest rates rise, you won't miss out on the rate increase. On the other hand, if you
expect rates to fall in the future, it may make more sense to buy a fixed-rate CD to lock in the higher rate for a
specific term.
Another alternative is to create a CD ladder. You might start by dividing the amount you plan to invest in CDs
into four equal amounts and buy four CDs with varying termssay three months, six months, nine months, and
one year. As each CD matures, you replace it with a one-year CD, so you have an amount to cash in or
reinvest on a regular schedule. If you used a longer ladder, so that your CDs matured on an annual instead of a
quarterly basis, you would never have all your money invested at the same rate, which would allow you to
avoid locking in a large sum at a low rate.

Take Care With Long-Term CDs and Call Features

CDs are usually described, quite accurately, as conservative investments because of their FDIC insurance and
relatively short terms. However, not all CDs are alike. In addition to regular CDs, whose terms are rarely longer
than five years, banks may offer long-term, high-yield CDs that pay a much higher rate of interest for terms as
long as 10 or 20 years. These CDs may be callable, which means that the bank has the right to terminate the
CD and pay you back your principal plus the interest earned to that point. This usually happens if your CD is
paying higher interest than CDs currently on the market, and it means you would have to reinvest your principal
at a lower rate than your old one paid. However, unlike the bank, you don't have the right to end a CD contract
if the situation is reversed and your CD is paying less than the current market rates.
In fact, you may want to think twice about any long-term CD because of the early withdrawal penalty. Generally
speaking, investments that cost you money simply for changing your mind are rarely the best alternative.

Brokered CDsNot Always FDIC Insured

You may also be offered a brokered CD by a stockbroker or other investment professional who serves as a
deposit broker for the issuing bank. Brokered CDs may have a longer holding period than a CD you purchase
directly from a bank, and they may be more complex and carry more risk. Although most brokered CDs are

bank products, some may be securitiesand won't be FDIC insured.

Brokered CDs differ in other ways from traditional CDs. For example, you may have to pay a fee to buy a
brokered CD, either as a fixed amount or as a percentage of the amount you are investing. If the fee is modest
and the CD is paying a higher rate than you could find on your own, you may come out ahead. But you should
take the fee into account. You may also have to invest a minimum amount, such as $10,000 or more.
If the bank issuing the CD is FDIC-insured and if the CD is a bank product, your account value should be
insured for up to $250,000. (This limit might change at the end of 2009.) Keep these two things in mind, though:
To be eligible for insurance, you must be listed as the CD's owner, so you'll want to confirm that it's registered
to you or held in your name by a custodian or trustee. Second, if the issuer happens to be a bank where you
already have money on deposit, the total value of your accounts could be higher than the amount of the
insurance. If the bank fails, you might be vulnerable to loss.
Unlike a traditional CD, brokered CDs can't simply be cashed in with the issuing bank. As a result, some firms
that offer brokered CDs may maintain a secondary marketbut these secondary markets tend to be quite
limited. If you want or need to liquidate your brokered CD before maturity, you may be subject to what's known
as market risk. This means the CD may be worth less than the amount you invested because other investors
are not willing to pay full price to own it. This might happen if the interest rate that new CDs are paying is higher
than the rate on your CD.

Questions to Ask About CDs

Before you buy any CD, you should ask several questions:
What interest rate does the CD pay and what is the annual percentage yield (APY)?
Is the rate fixed or variable, and if it's variable, what triggers an adjustment and when does the

change occur?
When does the CD mature?
What's the penalty for early withdrawal and are there exceptions to the early withdrawal fee?
Does the bank have the right to call the CD, and if so, when could that occur?
Is the issuing bank FDIC insured?

And if you purchase a brokered CD through a deposit broker, you should also ask the following additional
questions:
Is the brokered CD a bank product or a security?
What is the name of the issuing bank?
Is the issuing bank insured by the FDIC?
Is the deposit broker someone you knowwhose credentials you have checked?
CDs are useful additions to most investment portfolios because they offer safety and a predictable return. If you
keep a portion of your assets in cash, CDs or U.S. Treasury bills are usually the most logical choices. And if
you've been accumulating money to pay for specific goals, such as making the down payment on a home or
paying tuition bills, you may want move some of this money into CDs as the date you'll need the money gets
closer. That way, you can be sure you'll have it when you need it.

Beyond Banking
In addition to checking and savings accounts, your local bank may offer you investment accounts that you can
use to save for college or retirement, insurance coverage for your home or your life, or annuities to help you

generate retirement income. But it's important to remember that just because you're buying these products
from a bank doesn't mean they're FDIC insured. In fact, they're not.
However, you may find that the convenience of having all of your financial activities under one roof makes your
life easier. And if you already have a relationship with a particular bank, you may feel more comfortable going
there for a broader range of financial services. In fact, some banks now employ investment professionals, as
well as tellers and account managers to help you coordinate your whole financial strategy. If you are unsure
about which accounts are insured and for how much, be sure to ask.

Margin Investing

Purchasing on Margin, Risks Involved With Trading in a Margin Account

We are issuing this investor guidance to provide some basic facts to investors about the practice of purchasing
securities on margin, and to alert investors to the risks involved with trading securities in a margin account.
Use of Margin Accounts
A customer who purchases securities may pay for the securities in full or may borrow part of the purchase price
from his or her securities firm. If the customer chooses to borrow funds from a firm, the customer will open a
margin account with the firm. The portion of the purchase price that the customer must deposit is called
margin and is the customers initial equity in the account. The loan from the firm is secured by the securities
that are purchased by the customer. A customer may also enter into a short sale through a margin account,
which involves the customer borrowing stock from a firm in order to sell it, hoping that the price will decline.
Customers generally use margin to leverage their investments and increase their purchasing power. At the
same time, customers who trade securities on margin incur the potential for higher losses.
Margin Requirements
The terms on which firms can extend credit for securities transactions are governed by federal regulation and
by the rules of FINRA and the securities exchanges. This investor guidance focuses on the requirements for
marginable equity securities, which includes most stocks. Some securities cannot be purchased on margin,
which means they must be purchased in a cash account, and the customer must deposit 100 percent of the
purchase price. In general, under Federal Reserve Board Regulation T, firms can lend a customer up to 50
percent of the total purchase price of a stock for new, or initial, purchases. Assuming the customer does not
already have cash or other equity in the account to cover its share of the purchase price, the customer will
receive a margin call from the firm. As a result of the margin call, the customer will be required to deposit the
other 50 percent of the purchase price.
The rules of FINRA and the exchanges supplement the requirements of Regulation T by placing
"maintenance" margin requirements on customer accounts. Under the rules of FINRA and the exchanges, as a
general matter, the customers equity in the account must not fall below 25 percent of the current market value

of the securities in the account. Otherwise, the customer may be required to deposit more funds or securities in
order to maintain the equity at the 25 percent level. The failure to do so may cause the firm to force the sale of
or liquidatethe securities in the customers account in order to bring the accounts equity back up to the
required level.
Margin TransactionExample
For example, if a customer buys $100,000 of securities on Day 1, Regulation T would require the customer to
deposit margin of 50 percent or $50,000 in payment for the securities. As a result, the customers equity in the
margin account is $50,000, and the customer has received a margin loan of $50,000 from the firm. Assume that
on Day 2 the market value of the securities falls to $60,000. Under this scenario, the customers margin loan
from the firm would remain at $50,000, and the customers account equity would fall to $10,000 ($60,000
market value less $50,000 loan amount). However, the minimum maintenance margin requirement for the
account is 25 percent, meaning that the customers equity must not fall below $15,000 ($60,000 market value
multiplied by 25 percent). Since the required equity is $15,000, the customer would receive a maintenance
margin call for $5,000 ($15,000 less existing equity of $10,000). Because of the way the margin rules operate,
if the firm liquidated securities in the account to meet the maintenance margin call, it would need to liquidate
$20,000 of securities.
Firm Practices
Firms have the right to set their own margin requirementsoften called "house" requirementsas long as they
are higher than the margin requirements under Regulation T or the rules of FINRA and the exchanges. Firms
can raise their maintenance margin requirements for specific volatile stocks to ensure there are sufficient funds
in their customers' accounts to cover large price swings. These changes in firm policy often take effect
immediately and may result in the issuance of a maintenance margin call. Again, a customer's failure to satisfy
the call may cause the firm to liquidate a portion of the customer's account.
Margin Agreements and Disclosures
If a customer trades stocks in a margin account, the customer needs to carefully review the margin agreement
provided by his or her firm. A firm charges interest for the money it lends its customers to purchase securities
on margin, and a customer needs to understand the additional charges he or she may incur by opening a
margin account. Under the federal securities laws, a firm that loans money to a customer to finance securities
transactions is required to provide the customer with written disclosure of the terms of the loan, such as the
rate of interest and the method for computing interest. The firm must also provide the customer with periodic
disclosures informing the customer of transactions in the account and the interest charges to the customer.
Loans From Other Sources
In some cases, firms may arrange loans for customers from other sources, and there have been instances of
customers making loans to other customers to finance securities trades. A customer that lends money to
another customer should be careful to understand the significant additional risks that he or she faces as a
result of the loan, and needs to carefully read any loan authorization forms. A lending customer should be
aware that such a loan may be unsecured and may not be eligible for protection by the Securities Investor
Protection Corporation (SIPC). The firm may not, without direction from the borrowing customer, transfer
money from the borrowing customers account to the lending customers account to repay the loan.
Additional Risks Involved With Trading on Margin
There are a number of additional risks that all investors need to consider in deciding to trade securities on
margin. These risks include the following:

You can lose more funds than you deposit in the margin account. A decline in the value of

securities that are purchased on margin may require you to provide additional funds to the firm
that has made the loan to avoid the forced sale of those securities or other securities in your
account.
The firm can force the sale of securities in your account. If the equity in your account falls

below the maintenance margin requirements under the lawor the firms higher "house"
requirementsthe firm can sell the securities in your account to cover the margin deficiency. You
will also be responsible for any short fall in the account after such a sale.
The firm can sell your securities without contacting you. Some investors mistakenly believe

that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate
securities in their accounts to meet the call unless the firm has contacted them first. This is not the
case. As a matter of good customer relations, most firms will attempt to notify their customers of
margin calls, but they are not required to do so.
You are not entitled to an extension of time on a margin call. While an extension of time to

meet initial margin requirements may be available to customers under certain conditions, a
customer does not have a right to the extension. In addition, a customer does not have a right to
an extension of time to meet a maintenance margin call.
It is important that investors take time to learn about the risks involved in trading securities on margin, and
investors should consult their brokers regarding any concerns they may have with their margin accounts.
Additional Information
For additional information on margin in the context of online trading, investors should read Notice 99-11
(February 1999) and the Securities and Exchange Commissions (SEC) Tips for Online Investing at the SEC
website.

Understanding Margin Accounts, Why Brokers Do What They Do

We are issuing this investor guidance to provide some basic facts to investors about the mechanics of margin
accounts. We encourage any investor reading this communication to also read Purchasing on Margin, Risks
Involved with Trading in a Margin Account.
How Margin Calls Work in Volatile Times
Many margin investors are familiar with the "routine" margin call, where the broker asks for additional funds
when the equity in the customers account declines below certain required levels. Normally, the broker will allow
from two to five days to meet the call. The brokers calls are usually based upon the value of the account at
market close since various securities regulations require an end-of-day valuation of customer accounts. The
current "close" for most brokers is 4 p.m., Eastern time.
However, in volatile markets, a broker may calculate the account value at the close and then continue to
calculate calls on subsequent days on a real-time basis. When this happens, the investor might experience
something like the following:
Day one close: A customer has 1,000 shares of XYZ in his account. The closing price is $60, therefore, the
market value of the account is $60,000. If the brokers equity requirement is 25 percent, the customer must

maintain $15,000 in equity in the account. If the customer has an outstanding margin loan against the securities
of $50,000, his equity will be $10,000 ($60,000 - $50,000 = $10,000). The broker determines the customer
should receive a margin call for $5,000 ($15,000 - $10,000 = $5,000).
Day two: At some point early in the day the broker contacts the customer (e.g., by an e-mail message) telling
the customer he has "x" number of days to deposit $5,000 in the account. Shortly thereafter, on Day two, the
broker sells the customer out without notice.
What happened here?
In many cases, brokers have computer-generated programs that will issue an alarm (and/or take automatic
action) in the event the equity in a customers account further declines. For example, assume the value of the
XYZ stock in the customers account continues to decline during the morning of Day two by another $6,000,
that is, the shares are now worth only $54,000. The customer still has a loan outstanding to the broker of
$50,000, but now the broker only has $54,000 in market value securing that loan. So, based upon the
subsequent decline, the broker decided to sell shares of XYZ before they could decline even further in value.
Had the value of the securities stayed at about $60,000, the broker probably would have allowed the customer
the stated number of days to meet the margin call. Only because the market continued to decline did the broker
exercise its right to take further action and sell out the account.
What could the customer have done to avoid this?
The bottom line is that margin accounts require work on behalf of the customer. Information about the price of a
stock is available from any number of sources. In fact, many investors check these prices on a daily basis, if
not several times a day. An investor is free to deposit additional cash into a margin account at any time in an
attempt to avoid a margin call. However, even if additional deposits are made, subsequent declines in the
market value of securities in the account may result in additional margin calls. If an investor does not have
access to funds to meet a margin call, he should probably not be using a margin account. While cash accounts
do not provide the leverage that a margin account does, cash accounts are easier to maintain in that they do
not require the vigilance that a margin account requires.
Partial Sell Outs
In a partial sell out, somebut not allthe securities in a customers account will be sold out.
Example 1:
Mr. Jones has three stocks in his account totaling $90,000 in market value: $30,000 in ABC for which he has a
substantial long-term (i.e., capital) gain, $30,000 in DEF in which he has a large loss (which could be used to
offset gains in stocks sold earlier in the year), and $30,000 in GHI in which he has a short-term gain for tax
purposes. Each stock has a 25 percent maintenance margin requirement. Mr. Jones has a $6,000 unmet
maintenance margin call, so the broker sold out some of his securities. The broker chose to sell out GHI. Mr.
Jones is in a very high tax bracket, so the sale results in a large tax bill for him. Mr. Jones is upset as he would
have preferred the broker sell out either of the other two securities.
Example 2:

Ms. Young has $10,000 each in stocks JKL, MNO, and PQR. JKL is a fairly stable stock so the broker requires
only the standard 25 percent maintenance margin requirement on it. MNO is more volatile, so the broker set a
40 percent "house" requirement on the stock. Finally, PQR has been experiencing a lot of volatility in recent
months, so the broker set a 75 percent "house" requirement for that stock. Ms. Young has a $2,200 unmet
maintenance margin call, so the broker sold out some of her securities. The broker chose to sell out JKL. Ms.
Young is upset because she thinks the broker should have sold out shares of PQR since it had the highest (i.e.,
75 percent) maintenance margin requirement.
What happened in the above 2 examples?
It is important to remember that while customers borrow individually, brokers lend collectively. As such, brokers
are concerned with overall financial exposure. In each example, the broker had numerous customers who had
borrowed money against GHI and JKL. In order to reduce its exposure to "concentrated positions," where one
or more securities support a large amount of customer debt, the brokers computers were programmed so that
if sell outs were required, the securities sold would be those which represent the greatest financial risk to the
broker.
What could customers Jones and Young have done to avoid this?
The way to avoid this is to understand that first and foremost a broker is an extender of credit that will act to
limit its financial exposure in rapidly changing markets. The broker is not a "tax preparer" and is not required to
base its actions on the customers tax situation. Nor is the broker required to sell out securities of the
customers choosing. The only way to avoid sell outs is to make sure you maintain a sufficient equity "cushion"
in a margin account at all times, or to limit trades to cash accounts, where an investor must pay for the trade in
full on a timely basis.
When $2,000 Isnt $2,000!
Mr. Smith has read investor education articles stating that the minimum requirement for a margin account is
$2,000. However, when he attempts to open a margin account with Broker S, that brokers clearing firm will not
allow him to trade on margin at all. Mr. Smith then tries to open a margin account at Broker T, and is told it
wont open a margin account for him unless he deposits $20,000.
What might have happened here?
Brokers, like other lenders, have policies and procedures in place to protect themselves from market risk, or the
decline in the value of securities collateral, as well as credit risk, where one or more investors cannot or refuse
to meet their financial obligations to the broker. Among the options available to them, they have the right to
increase their margin requirements or choose not to open margin accounts.
Margin is buying securities on credit while using those same securities as collateral for the loan. Any residual
loan balance is the responsibility of the borrower.
Assume that Mr. Smith recently bought $36,000 in stock on margin from Broker R. He deposited $18,000, and
borrowed the remaining $18,000 from Broker R. Shortly thereafter, the stock declined rapidly in value. Broker R
sold out the stock for $12,000 and kept the proceeds to repay part of the loan. However, since Mr. Smith had
borrowed $18,000, the $12,000 in proceeds did not satisfy the loan. The broker asked Mr. Smith to send a
check for the remaining $6,000. Mr. Smith did not pay the $6,000.

When Mr. Smith attempted to open accounts at Brokers S and T, each firm conducted its standard credit review
process. They each made an inquiry to a securities industry data center and discovered that Mr. Smith had
defaulted on a $6,000 loan to Broker R. Broker S decided it did not want to do business with Mr. Smith at all,
Broker T was only willing to retain his account with a substantial deposit.
What could a customer have done to avoid this?
Any obligation to a broker should be taken as seriously by an investor as an obligation to a bank or other
lender. Failure to meet obligations to a broker may result in legal action against the customer and will almost
certainly cause the broker to report the default to a data center. If you cant pay for a securities transaction,
whether your order is placed in a cash or margin account, you should not place that order. Individuals should
participate in the securities markets only when they have the financial ability to withstand the risks and meet
their obligations.
It is important that investors take time to learn about the risks involved in trading securities on margin, and
investors should consult their brokers regarding any concerns they may have with their margin accounts.
Additional Information
For additional information on margin in the context of online trading, investors should read NASD Notice to
Members 99-11 (February 1999)available on this websiteand the Securities and Exchange Commissions
(SEC) Tips for Online Investing at the SEC website.
Also, visit our Margin Information section for more information on the topic of marg

Investing with Borrowed Funds: No "Margin" for Error

With investor purchases of securities on margin averaging more than $270 billion per month in 2009, we
are re-issuing this alert because we are concerned that many investors may underestimate the risks of trading
on margin and misunderstand the operation and reason for margin calls. Investors who cannot satisfy margin
calls can have large portions of their accounts liquidated under unfavorable market conditions. These
liquidations can create substantial losses for investors.
Before you decide to open a margin account, make sure you understand the following risks:

Your firm can force the sale of securities in your accounts to meet a margin call
Your firm can sell your securities without contacting you
You are not entitled to choose which securities or other assets in your accounts are sold
Your firm can increase its margin requirements at any time and is not required to provide you with

advance notice
You are not entitled to an extension of time on a margin call
You can lose more money than you deposit in a margin account

This alert will explain these risks and provide you with some basic facts about purchasing securities on margin.
How Margin Accounts Work
With a margin account, you can borrow money from your brokerage firm to purchase securities. The portion of
the purchase price that you must deposit is called margin and is your initial equity or value in the account. The
loan from the firm is secured by the securities you purchase. If the securities you're using as collateral go down
in price, your firm can issue a margin call, which is a demand that you repay all or part of the loan with cash, a
deposit of securities from outside your account, or by selling some of the securities in your account.
Caution - Buying on margin amounts to getting a loan from your firm. When you buy on margin, you must
repay both the amount you borrowed and interest, even if you lose money on your investment. Some
brokerage firms automatically open margin accounts for investors. Make sure that you understand what type of
account you are opening. If you don't want to trade on margin, choose a cash account for your transactions.
Margin Costs
Buying on margin carries a cost. This cost is the interest you will pay on the amount you borrow until it is
repaid. Margin interest rates generally vary based on the current "broker call rate" or "call money rate" and
the amount you borrow. Rates also vary from firm to firm. You can find the current "call money" rate in The Wall
Street Journal listed under "Money Rates." Most brokerage firms publish their current margin interest rates on
their websites.
Margin Loans: Who's Profiting?
Margin loans can be highly profitable for your brokerage firm. They may also be highly profitable for your
broker. Your broker may receive fees based on the amount of your margin loans. This may take the form of a
percentage of the interest you pay on an ongoing basis.
Margin Requirements
The Federal Reserve Board, FINRA, and securities exchanges, including the New York Stock Exchange
(NYSE), regulate margin trading. Most brokerage firms also establish their own more stringent margin
requirements. This alert focuses on the requirements for purchases of marginable equity securities, which
include stocks traded in the U.S. Different requirements apply to short sales, security futures, other types of
securities, and certain foreign securities.
Minimum Margin
Before purchasing a security on margin, NASD Rule 2520 and NYSE Rule 431 require that you deposit
$2000 or 100 percent of the purchase pricewhichever is lessin your account. This is called "minimum
margin." If you will be day trading, you are required to deposit $25,000. To learn more about day-trading
margin requirements, please read Day Trading Margin Requirements: Know the Rules.
Initial Margin
In general, under Federal Reserve Board Regulation T, you can borrow up to 50 percent of the total
purchase price of a stock for new, or initial, purchases. This is called "initial margin." Assuming you do not
already have cash or other securities in your account to cover your share of the purchase price, you will

receive a margin call (or "Fed call") from your firm that requires you to deposit the other 50 percent of the
purchase price.
Maintenance Margin
After you purchase a stock on margin, NASD Rule 2520 and NYSE Rule 431 supplement the requirements
of Regulation T by placing "maintenance margin requirements" on your accounts. Under these rules, as a
general matter, your equity in the account must not fall below 25 percent of the current market value of the
securities in the account. If it does, you will receive a maintenance margin call that requires you to deposit
more funds or securities in order to maintain the equity at the 25 percent level. The failure to do so may
cause your firm to force the sale ofor liquidatethe securities in your account to bring the account's
equity back up to the required level.
Firm Requirements
Your firm has the right to set its own margin requirementsoften called "house requirements"as long as
they are higher than the margin requirements under Regulation T or the rules of NASD and the exchanges.
Some firms raise their maintenance margin requirements for certain volatile stocks or a concentrated or
large position in a single stock to help ensure that there are sufficient funds in their customer accounts to
cover the large swings in the price of these securities. In some cases, a firm may not even permit you to
purchase or own certain securities on margin. These changes in firm policy often take effect immediately
and may result in the issuance of a maintenance margin call (or "house call"). Again, if you fail to satisfy the
call, your firm may liquidate a portion of your account.

Margin TransactionExample
For example, if you buy $100,000 of securities on Day 1, Regulation T would require you to deposit initial
margin of 50 percent or $50,000 in payment for the securities. As a result, your equity in the margin account is
$50,000, and you have received a margin loan of $50,000 from the firm. Assume that on Day 2 the market
value of the securities falls to $60,000. Under this scenario, your margin loan from the firm would remain at
$50,000, and your account equity would fall to $10,000 ($60,000 market value minus $50,000 loan amount).
However, the minimum maintenance margin requirement for the account is 25 percent, meaning that your
equity must not fall below $15,000 ($60,000 market value multiplied by 25 percent). Since the required equity is
$15,000, you would receive a maintenance margin call for $5,000 ($15,000 less existing equity of $10,000).
Because of the way the margin rules operate, if the firm liquidated securities in the account to meet the
maintenance margin call, it would need to liquidate $20,000 of securities.

Margin Trading Risks

There are a number of risks that you need to consider in deciding to trade securities on margin. These include:

Your firm can force the sale of securities in your accounts to meet a margin call. If the
equity in your account falls below the maintenance margin requirements under the lawor the
firm's higher "house" requirementsyour firm can sell the securities in your accounts to cover the
margin deficiency. You will also be responsible for any short fall in the accounts after such a sale.

Your firm can sell your securities without contacting you. Some investors mistakenly believe
that a firm must contact them first for a margin call to be valid. This is not the case. Most firms will

attempt to notify their customers of margin calls, but they are not required to do so. Even if you're
contacted and provided with a specific date to meet a margin call, your firm may decide to sell
some or all of your securities before that date without any further notice to you. For example, your
firm may take this action because the market value of your securities has continued to decline in
value.

You are not entitled to choose which securities or other assets in your accounts are sold.
There is no provision in the margin rules that gives you the right to control liquidation decisions.
Your firm may decide to sell any of the securities that are collateral for your margin loan to protect
its interests.

Your firm can increase its "house" maintenance requirements at any time and is not
required to provide you with advance notice. These changes in firm policy often take effect
immediately and may cause a house call. If you don't satisfy this call, your firm may liquidate or
sell securities in your accounts.

You are not entitled to an extension of time on a margin call. While an extension of time to
meet a margin call may be available to you under certain conditions, you do not have a right to the
extension.

You can lose more money than you deposit in a margin account. A decline in the value of the
securities you purchased on margin may require you to provide additional money to your firm to
avoid the forced sale of those securities or other securities in your accounts.

Do Your Margin Homework!

Make sure you fully understand how a margin account works. If you don't, limit your
investments to a cash account. Cash accounts are not subject to margin calls. It is important to
take time to learn about the risks involved in trading securities on margin. Consult with your broker
about any concerns you may have with your margin account.

Know the margin rules. We've discussed some of the margin requirements in this alert. To learn
more, you can find NASD Rule 2520 and Regulation T in the NASD Manual.

Know your firm's margin policies. Read your firm's margin agreement and margin disclosure
statement. Be sure to ask whether you will automatically be placed into a margin account
and, if so, what the rate of interest will be and what circumstances would trigger a margin
loan. Speak with your broker or check your firm's website for any changes in margin policies.
Firms can make changes at their discretion, and are more likely to do so in volatile markets.

If you use a margin account, you may not want to use all your available money to trade
securities in your margin account. For example, you may want to keep some money in a
checking or savings account so that you can promptly meet a margin call.

Manage your margin account. Margin accounts require work. Monitor the price of the securities
in your margin account on a daily basis. If you see that the securities in your account are declining
in value, you may want to consider depositing additional cash or securities to attempt to avoid a
margin call. If you receive a margin call, act promptly to satisfy the margin call. By depositing cash

or selling securities that you choose, you may be able to avoid your firm liquidating or selling
securities it chooses.
Where to Turn for Help
If you have a problem with your margin account that your firm did not resolve to your satisfaction, you can file a
complaint online at FINRA's Investor Complaint Center

Margin Statistics
Pursuant to FINRA Rule 4521, FINRA member firms carrying margin accounts for customers are required to
submit, on a settlement date basis, as of the last business day of the month, the following customer
information:

the total of all debit balances in securities margin accounts; and

the total of all free credit balances in all cash accounts and all securities margin accounts.

FINRA collects the required data via FINRAs Customer Margin Balance Form. The data is compiled in
aggregate form and made available below. See Regulatory Notice 10-08 (Customer Margin Accounts) for more
information.

FINRA Statistics2 (shown in $ millions)

Month/Year

Debit Balances in Customers' Free Credit Balances in

Securities Margin Accounts Customers' Cash Accounts

Free Credit Balances in

Customers' Securities
Margin Accounts

Jan-11

326,868

130,894

173,545

Feb-11

348,979

135,760

179,102

Mar-11

355,413

133,386

170,139

Apr-11

360,883

133,131

175,399

May-11

355,736

133,727

175,508

Month/Year

Debit Balances in Customers' Free Credit Balances in

Securities Margin Accounts Customers' Cash Accounts

Free Credit Balances in

Customers' Securities
Margin Accounts

Feb-10

263,657

106,131

164,624

Mar-10

277,798

108,908

162,169

Apr-10

295,550

111,217

160,630

May-10

268,566

114,051

166,706

Jun-10

263,202

114,265

172,908

Jul-10

267,468

106,290

172,179

Aug-10

268,371

106,870

174,209

Sep-10

288,540

114,321

173,544

Oct-10

303,428

114,784

176,588

Nov-10

309,340

119,305

176,805

Dec-10

313,678

126,098

182,426

1 Note that under FINRA Rule 4521, free credit balances in customers cash accounts and customers
securities margin accounts must be reported as two separate data points.
2 As of February 2010, data are collected pursuant to FINRA Rule 4521 and are aggregated across all member
firms, regardless of whether the firm was designated to NASD or the New York Stock Exchange (NYSE) before
the consolidation of NASD and the member firm regulation operations of NYSE Regulation in July 2007 that
created FINRA.

Historical Data
Through January 2010, NYSE and FINRA each independently collected similar margin data from their
respective member firms. The data below are divided into three sections:
1.
2.
3.

FINRA statistics only (from FINRA-designated clearing firms only);

NYSE statistics only (from NYSE-designated clearing firms only); and
Combined statistics from both FINRA and NYSE beginning in 1997.

For the period of July 2007 (when NASD and the member firm regulation operations of NYSE Regulation
consolidated to become FINRA) through January 2010, the NYSE statistics set forth below include clearing
firms historically designated to NYSE, and the FINRA statistics include clearing firms historically designated to
NASD.
Note that the combined FINRA and NYSE statistics as given below have been compiled from different reports
that member firms submitted to FINRA or NYSE, as required.

FINRA Statistics (shown in $ millions)

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-10

32,771

57,689

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-09

27,297

67,573

Feb-09

26,345

64,643

Mar-09

21,807

63,687

Apr-09

23,890

67,908

May-09

25,151

67,933

Jun-09

28,890

73,544

Jul-09

29,274

74,222

Aug-09

29,531

71,499

Sep-09

33,317

74,776

Oct-09

33,584

69,198

Nov-09

30,030

61,638

Dec-09

31,520

65,576

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-08

37,262

56,006

Feb-08

42,188

55,065

Mar-08

37,759

61,041

Apr-08

36,753

58,031

May-08

31,300

49,218

Jun-08

32,532

52,204

Jul-08

30,007

50,136

Aug-08

32,704

53,332

Sep-08

45,785

81,682

Oct-08

44,218

96,229

Nov-08

25,854

75,402

Dec-08

23,475

57,083

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-07

25,896

45,991

Feb-07

25,301

48,382

Mar-07

24,577

43,899

Apr-07

24,094

47,814

May-07

29,282

49,129

Jun-07

30,204

48,397

Jul-07

35,033

52,401

Aug-07

31,105

48,410

Sep-07

29,594

49,914

Oct-07

31,559

48,803

Nov-07

35,293

51,671

Dec-07

32,512

50,753

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-06

23,605

57,349

Feb-06

26,829

58,003

Mar-06

22,700

56,818

Apr-06

23,624

57,322

May-06

25,068

57,007

Jun-06

25,715

58,325

Jul-06

24,526

48,956

Aug-06

22,888

50,673

Sep-06

24,649

45,562

Oct-06

23,340

43,862

Nov-06

24,379

44,730

Dec-06

27,908

45,533

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-05

16,802

28,014

Feb-05

23,675

52,102

Mar-05

25,186

54,133

Apr-05

23,287

51,669

May-05

23,134

52,763

Jun-05

23,653

52,422

Jul-05

22,645

51,112

Aug-05

22,740

50,450

Sep-05

26,909

52,889

Oct-05

27,328

52,514

Nov-05

23,884

52,755

Dec-05

22,438

54,765

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-04

10,609

23,318

Feb-04

10,088

21,943

Mar-04

11,741

22,713

Apr-04

17,498

29,652

May-04

15,373

28,330

Jun-04

13,903

25,421

Jul-04

10,814

21,946

Aug-04

10,728

23,335

Sep-04

13,568

26,740

Oct-04

12,299

25,610

Nov-04

14,022

27,228

Dec-04

13,783

26,762

Month/Year

Debit Balances in Customers'

Free and Other Credit Balances in

Cash and Margin Accounts

Customers' Securities Accounts

Jan-03

6,481

16,898

Feb-03

6,486

17,265

Mar-03

8,357

17,265

Apr-03

7,297

19,436

May-03

7,345

19,136

Jun-03

19,731

27,756

Jul-03

25,977

32,593

Aug-03

17,540

28,072

Sep-03

15,324

26,446

Oct-03

12,708

22,664

Nov-03

10,447

20,329

Dec-03

8,239

21,817

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-02

10,516

17,401

Feb-02

7,901

14,839

Mar-02

10,719

17,088

Apr-02

8,132

15,050

May-02

6,942

14,325

Jun-02

7,702

14,634

Jul-02

7,745

16,386

Aug-02

6,346

15,895

Sep-02

5,897

14,817

Oct-02

8,077

17,669

Nov-02

6,412

17,442

Dec-02

5,071

15,685

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-01

11,577

15,465

Feb-01

12,017

15,196

Mar-01

9,447

14,761

Apr-01

9,156

16,215

May-01

8,861

15,243

Jun-01

9,585

13,902

Jul-01

8,430

13,660

Aug-01

8,186

13,519

Sept-01

13,261

21,611

Oct-01

8,357

15,612

Nov-01

10,790

18,021

Dec-01

10,023

17,744

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-00

16,919

15,007

Feb-00

18,996

17,370

Mar-00

21,403

17,452

Apr-00

17,016

14,748

May-00

16,202

14,173

Jun-00

17,271

13,940

Jul-00

18,759

16,350

Aug-00

17,606

16,115

Sept-00

19,428

15,239

Oct-00

17,589

16,336

Nov-00

18,803

15,679

Dec-00

11,595

13,099

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-99

9,082

10,720

Feb-99

11,379

12,763

Mar-99

9,772

10,386

Apr-99

11,449

10,220

May-99

11,966

11,356

Jun-99

10,765

10,017

Jul-99

11,143

10,687

Aug-99

11,226

10,319

Sep-99

10,425

11,272

Oct-99

11,987

11,332

Nov-99

12,024

14,106

Dec-99

13,437

12,382

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-98

5,122

5,262

Feb-98

5,738

5,842

Mar-98

6,196

6,810

Apr-98

6,349

6,561

May-98

6,693

6,204

Jun-98

6,657

6,846

Jul-98

6,610

7,087

Aug-98

8,079

7,783

Sep-98

7,001

7,669

Oct-98

8,239

10,069

Nov-98

8,987

11,242

Dec-98

7,694

8,807

Month/Year

Debit Balances in Customers'

Cash and Margin Accounts

Free and Other Credit Balances in

Customers' Securities Accounts

Jan-97

3,877

4,706

Feb-97

3,886

4,768

Mar-97

4,675

5,573

Apr-97

3,972

4,565

May-97

5,087

5,429

Jun-97

5,403

6,722

Jul-97

4,900

5,439

Aug-97

4,594

4,876

Sep-97

5,912

5,687

Oct-97

6,301

5,872

Nov-97

5,411

5,054

Dec-97

5,470

5,020

NYSE Statistics (shown in $ millions)

(These statistics are provided courtesy of the New York Stock Exchange, Inc.)
Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-10

233,684

134,677

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-09

177,710

93,500

155,690

Feb-09

173,310

91,120

154,740

Mar-09

182,160

90,560

137,680

Apr-09

184,120

91,890

125,860

May-09

189,250

89,880

117,500

Jun-09

188,250

89,980

120,350

Jul-09

199,460

84,040

118,820

Aug-09

206,720

90,450

120,040

Sep-09

220,790

86,490

125,930

Oct-09

231,820

94,150

136,510

Nov-09

220,958

87,487

134,946

Dec-09

230,879

91,687

123,780

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-08

328,330

276,390

88,669

142,100

Feb-08

334,900

133,670

266,050

Mar-08

311,660

122,140

305,650

Apr-08

295,550

100,600

313,740

May-08

310,310

95,930

325,040

Jun-08

314,360

96,090

351,340

Jul-08

313,290

98,890

370,200

Aug-08

292,110

90,860

358,850

Sep-08

299,960

106,670

193,350

Oct-08

233,350

100,330

186,870

Nov-08

201,480

103,510

185,320

Dec-08

186,710

106,650

181,980

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-07

285,610

90,340

156,190

Feb-07

295,870

96,550

155,140

Mar-07

293,160

99,690

161,890

Apr-07

317,990

104,360

162,570

May-07

353,030

109,030

176,200

Jun-07

378,240

119,300

179,920

Jul-07

381,370

122,740

205,830

Aug-07

331,370

118,250

214,890

Sep-07

329,510

118,910

208,540

Oct-07

345,420

120,840

222,900

Nov-07

344,300

128,530

246,520

Dec-07

322,780

130,620

274,980

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-06

232,190

83,250

115,220

Feb-06

222,780

81,600

117,970

Mar-06

236,670

82,750

119,360

Apr-06

241,540

83,000

119,020

May-06

230,540

81,090

126,210

Jun-06

225,780

84,400

137,550

Jul-06

231,490

79,420

141,000

Aug-06

226,480

79,460

139,290

Sep-06

237,120

80,470

142,580

Oct-06

244,370

80,200

143,400

Nov-06

270,520

90,980

155,200

Dec-06

275,380

94,450

159,040

Month/Year

Debit Balances in Margin Free Credit Balances

Free Credit Balances

Accounts

in Cash Accounts

in Margin Accounts

Jan-05

203,320

87,260

115,350

Feb-05

199,480

77,960

94,330

Mar-05

201,690

80,200

100,200

Apr-05

194,160

74,720

97,450

May-05

196,270

72,690

99,480

Jun-05

200,500

76,380

105,550

Jul-05

210,940

74,130

99,000

Aug-05

208,660

75,910

99,050

Sep-05

217,760

79,310

106,730

Oct-05

212,540

77,550

113,110

Nov-05

219,020

78,330

110,610

Dec-05

221,660

88,730

119,710

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-04

178,820

82,740

92,570

Feb-04

180,360

84,540

93,840

Mar-04

179,710

80,560

100,680

Apr-04

181,280

84,670

103,670

May-04

178,470

85,060

106,250

Jun-04

180,090

85,540

109,820

Jul-04

177,030

83,530

114,720

Aug-04

177,100

80,280

114,330

Sep-04

180,100

83,400

110,720

Oct-04

185,700

81,610

110,870

Nov-04

196,990

85,740

110,960

Dec-04

203,790

93,580

117,850

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-03

134,910

66,200

96,430

Feb-03

134,030

67,260

95,400

Mar-03

135,910

68,860

90,830

Apr-03

135,940

60,680

88,640

May-03

146,380

71,270

88,540

Jun-03

148,550

74,350

87,920

Jul-03

148,450

76,170

91,210

Aug-03

149,660

72,000

88,040

Sep-03

155,870

74,760

88,620

Oct-03

162,720

79,530

89,360

Nov-03

172,140

77,130

87,440

Dec-03

173,220

84,920

92,560

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-02

150,390

75,110

97,330

Feb-02

147,030

72,730

99,350

Mar-02

149,370

69,790

93,700

Apr-02

150,940

68,540

92,140

May-02

150,860

66,120

92,950

Jun-02

146,270

68,280

95,830

Jul-02

136,160

68,860

98,080

Aug-02

132,160

63,700

95,400

Sep-02

130,210

67,550

98,630

Oct-02

130,570

66,780

96,620

Nov-02

133,060

67,380

91,240

Dec-02

134,380

73,340

95,690

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-01

197,110

81,380

90,380

Feb-01

186,870

78,670

99,400

Mar-01

165,350

77,520

106,300

Apr-01

166,940

77,460

97,470

May-01

174,180

76,260

91,990

Jun-01

170,000

75,270

98,430

Jul-01

165,250

73,490

97,950

Aug-01

161,130

73,710

103,990

Sept-01

144,670

74,220

115,450

Oct-01

144,010

69,550

101,850

Nov-01

148,650

72,090

98,330

Dec-01

150,450

78,040

101,640

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-00

243,490

75,760

57,800

Feb-00

265,210

79,700

56,470

Mar-00

278,530

85,530

65,020

Apr-00

251,700

76,190

65,930

May-00

240,660

73,500

66,170

Jun-00

247,200

74,140

64,970

Jul-00

244,970

74,970

71,730

Aug-00

247,560

72,640

68,020

Sept-00

250,780

74,766

70,959

Oct-00

233,376

73,271

83,131

Nov-00

219,110

74,050

96,730

Dec-00

198,790

84,400

100,680

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-99

153,240

59,600

36,880

Feb-99

151,530

57,910

38,850

Mar-99

156,440

59,435

40,120

Apr-99

172,880

60,870

41,200

May-99

177,984

61,665

41,250

Jun-99

176,930

64,100

42,865

Jul-99

178,360

60,000

44,330

Aug-99

176,390

62,600

44,230

Sep-99

179,316

62,810

47,125

Oct-99

182,272

61,085

51,040

Nov-99

206,280

68,200

49,480

Dec-99

228,530

79,070

55,130

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-98

127,790

48,620

29,480

Feb-98

135,590

48,640

27,450

Mar-98

140,340

51,340

27,430

Apr-98

140,240

51,050

28,160

May-98

143,600

47,770

26,200

Jun-98

147,700

51,205

29,840

Jul-98

154,370

53,780

31,820

Aug-98

147,800

53,850

38,460

Sep-98

137,540

54,240

41,970

Oct-98

130,160

54,610

43,500

Nov-98

139,710

56,170

40,620

Dec-98

140,980

62,450

40,250

Month/Year

Debit Balances in Margin Free Credit Balances

Accounts
in Cash Accounts

Free Credit Balances

in Margin Accounts

Jan-97

99,460

41,280

22,870

Feb-97

100,000

40,090

22,200

Mar-97

100,160

41,050

22,930

Apr-97

98,870

37,560

22,700

May-97

106,010

39,400

22,050

Jun-97

113,440

41,840

23,860

Jul-97

116,190

43,985

24,290

Aug-97

119,810

42,960

23,375

Sep-97

126,050

43,770

23,630

Oct-97

128,190

47,465

26,950

Nov-97

127,330

45,470

26,735

Dec-97

126,090

52,160

31,410

FINRA and NYSE Combined Statistics (shown in $ millions)

Month/Year

Debit Balances*

Credit Balances**

Jan-10

266,455

281,035

Month/Year

Debit Balances*

Credit Balances**

Jan-09

205,007

316,763

Feb-09

199,655

310,503

Mar-09

203,967

291,927

Apr-09

208,010

285,658

May-09

214,401

275,313

Jun-09

217,140

283,874

Jul-09

228,734

277,082

Aug-09

236,251

281,989

Sep-09

254,107

287,196

Oct-09

265,404

299,858

Nov-09

250,988

284,071

Dec-09

262,399

281,043

Month/Year

Debit Balances*

Credit Balances**

Jan-08

365,592

474,496

Feb-08

377,088

454,785

Mar-08

349,419

488,831

Apr-08

332,303

472,371

May-08

341,610

470,188

Jun-08

346,892

499,634

Jul-08

343,297

519,226

Aug-08

324,814

530,042

Sep-08

345,745

381,702

Oct-08

277,568

383,429

Nov-08

227,334

364,232

Dec-08

210,185

345,713

Month/Year

Debit Balances*

Credit Balances**

Jan-07

311,506

292,521

Feb-07

321,171

300,072

Mar-07

317,737

305,479

Apr-07

342,084

314,744

May-07

382,312

334,359

Jun-07

408,444

347,617

Jul-07

416,403

380,971

Aug-07

362,475

381,550

Sep-07

359,104

377,364

Oct-07

376,979

392,543

Nov-07

379,593

426,721

Dec-07

355,292

456,353

Month/Year

Debit Balances*

Credit Balances**

Jan-06

255,795

255,819

Feb-06

249,609

257,573

Mar-06

259,370

258,928

Apr-06

265,164

259,342

May-06

255,608

264,307

Jun-06

251,495

280,275

Jul-06

256,016

269,376

Aug-06

249,368

269,423

Sep-06

261,769

268,612

Oct-06

267,710

267,462

Nov-06

294,899

290,910

Dec-06

303,288

299,023

Month/Year

Debit Balances*

Credit Balances**

Jan-05

220,122

230,624

Feb-05

223,155

224,392

Mar-05

226,876

234,533

Apr-05

217,447

223,839

May-05

219,404

224,933

Jun-05

224,153

234,352

Jul-05

233,585

224,242

Aug-05

231,400

225,410

Sep-05

244,669

238,929

Oct-05

239,868

243,174

Nov-05

242,904

241,695

Dec-05

244,098

263,205

Month/Year

Debit Balances*

Credit Balances**

Jan-04

189,429

198,628

Feb-04

190,448

200,323

Mar-04

191,451

203,953

Apr-04

198,778

217,992

May-04

193,843

219,640

Jun-04

193,993

220,781

Jul-04

187,844

220,196

Aug-04

187,828

217,945

Sep-04

193,668

220,860

Oct-04

197,999

218,090

Nov-04

211,012

223,928

Dec-04

217,573

238,192

Month/Year

Debit Balances*

Credit Balances* *

Jan-03

141,391

179,528

Feb-03

140,516

179,925

Mar-03

144,267

176,955

Apr-03

143,237

168,756

May-03

153,725

178,946

Jun-03

168,281

190,026

Jul-03

174,427

199,973

Aug-03

167,200

188,112

Sep-03

171,194

189,826

Oct-03

175,428

191,554

Nov-03

182,587

184,899

Dec-03

181,459

199,297

Month/Year

Debit Balances*

Credit Balances**

Jan-02

160,906

189,841

Feb-02

154,931

186,919

Mar-02

160,089

180,578

Apr-02

159,072

175,730

May-02

157,802

173,395

Jun-02

153,972

178,744

Jul-02

143,905

183,326

Aug-02

139,146

174,995

Sep-02

136,107

180,997

Oct-02

138,647

181,069

Nov-02

139,472

176,062

Dec-02

139,451

184,715

Month/Year

Debit Balances*

Credit Balances**

Jan-01

208,687

187,225

Feb-01

198,887

193,266

Mar-01

174,797

198,581

Apr-01

176,096

191,145

May-01

183,041

183,493

Jun-01

179,585

187,602

Jul-01

173,680

185,100

Aug-01

169,316

191,219

Sept-01

157,931

211,281

Oct-01

152,367

187,012

Nov-01

159,440

188,441

Dec-01

160,473

197,424

Month/Year

Debit Balances*

Credit Balances**

Jan-00

260,409

148,567

Feb-00

284,206

153,540

Mar-00

299,933

168,002

Apr-00

268,716

156,868

May-00

256,862

153,843

Jun-00

264,471

153,050

Jul-00

263,729

163,050

Aug-00

265,166

156,775

Sept-00

270,208

160,964

Oct-00

250,965

172,738

Nov-00

237,913

186,459

Dec-00

210,385

198,179

Month/Year

Debit Balances*

Credit Balances**

Jan-99

162,322

107,200

Feb-99

162,909

109,523

Mar-99

166,212

109,941

Apr-99

184,329

112,290

May-99

189,950

114,271

Jun-99

187,695

116,982

Jul-99

189,503

115,017

Aug-99

187,616

117,149

Sep-99

189,741

121,207

Oct-99

194,259

123,457

Nov-99

218,304

131,786

Dec-99

241,967

146,582

Month/Year

Debit Balances*

Credit Balances**

Jan-98

132,912

83,362

Feb-98

141,328

81,932

Mar-98

146,536

85,580

Apr-98

146,589

85,771

May-98

150,293

80,174

Jun-98

154,357

87,891

Jul-98

160,980

92,687

Aug-98

155,879

100,093

Sep-98

144,541

103,879

Oct-98

138,399

108,179

Nov-98

148,697

108,032

Dec-98

148,674

111,507

Month/Year

Debit Balances*

Credit Balances**

Jan-97

103,337

68,856

Feb-97

103,886

67,058

Mar-97

104,835

69,553

Apr-97

102,842

64,825

May-97

111,097

66,879

Jun-97

118,843

72,422

Jul-97

121,090

73,714

Aug-97

124,404

71,211

Sep-97

131,962

73,087

Oct-97

134,491

80,287

Nov-97

132,741

77,259

Dec-97

131,560

88,590

* Debit Balances are derived by adding NYSE Debit Balances in Margin Accounts to FINRA Debit Balances in
Customers' Cash and Margin Accounts.
** Credit Balances are derived by adding NYSE Free Credit Balances in Cash and Margin Accounts to FINRA
Free and Other Credit Balances in Customers' Securities Accounts.
For more information or questions about this page, please send an email to the Credit Regulation Department.

Joint Statement By NYSE and NASD On the Continuing Growth In Investor Margin
Debt

February 24, 2000

The continuing growth of the amount of customer margin account balances during the past year has caused
some commentors to question whether the investing public is over leveraging its investment positions.
Certainly, the growth of the overall equity securities market and of particular market segments has generated
considerable investor interest in the market. However, the increasing use of margin borrowings is not without
risk. In the event of a severe market contraction, some investors may not be in a position to sustain the
leveraging and will be required to liquidate their positions under unfavorable market conditions.

In view of the continuing increase in participation of individual investors in the market, the New York Stock
Exchange and NASD are asking their member firms to take several steps relative to the extension of margin
credit as follows:

Individual investors should continue to be advised about the risk of investing on margin.
Sales managers and account executives should be advised of the appropriate steps to be taken

when and if individual investors significantly change their levels of margin borrowings.
Any account executive incentive programs that would promote the solicitation of margin accounts
should be carefully reviewed and curtailed if appropriate.

Further, member organizations are reminded that in addition to the 25% maintenance margin requirements
provided for under our Margin Rules 431 and 2520 respectively, paragraph (d) requires that procedures be
established by member organizations to:
(1) review limits and types of credit extended to all customers;
(2) formulate their own margin requirements; and
(3) review the need for instituting higher margin requirements, mark-to-markets and collateral deposits than
are required by this Rule for individual securities or customer accounts.
Section (f) (1) of our Margin Rules provides, with regard to the determination of value for margin purposes, that
"Substantial additional margin must be required in all cases where the securities carried in 'long' or 'short'
positions are subject to unusually rapid or violent changes in value"
We understand that many member organizations generally maintain higher house maintenance margin
requirements on equities than 25%, and have imposed still higher maintenance requirements on specific stocks
and market segments. The NASD and NYSE request that member organizations review their maintenance
margin policies and requirements to consider whether further changes are necessary to address the rapid
growth of margin borrowing.
Thank you for your attention to these requests.
Frank G. Zarb
Chairman and Chief Executive Officer
National Association of Securities Dealers

Richard A. Grasso
Chairman and Chief Executive Officer
New York Stock Exchange, Inc.

Managing Investment Risk

When you invest, you take certain risks. With insured bank investments, such as certificates of deposit (CDs),
you face inflation risk, which means that you may not earn enough over time to keep pace with the increasing
cost of living. With investments that aren't insured, such as stocks, bonds, and mutual funds, you face the risk
that you might lose money, which can happen if the price falls and you sell for less than you paid to buy.

Just because you take investment risks doesn't mean you can't exert some control over what happens to the
money you invest. In fact, the opposite is true.
If you know the types of risks you might face, make choices about those you are willing to take, and understand
how to build and balance your portfolio to offset potential problems, you are managing investment risk to your
advantage.

Why Take Risks?

The question you might have at this point is, "Why would I want to risk losing some or all of my money?" In fact,
you might not want to put money at risk that you expect to need in the short termto make the down payment
on a home, for example, or pay a tuition bill for next semester, or cover emergency expenses. By taking certain
risks with the rest of your money, however, you may earn dividends or interest. In addition, the value of the
assets you purchase may increase over the long term.
If you prefer to avoid risk and put your money in an FDIC-insured certificate of deposit (CD) at your bank, the
most you can earn is the interest that the bank is paying. This may be good enough in some years, say, when
interest rates are high or when other investments are falling. But on average, and over the long haul, stocks
and bonds tend to grow more rapidly, which would make it easier or even possible to reach your savings goals.
That's because avoiding investment risk entirely provides no protection against inflation, which decreases the
value of your savings over time.
On the other hand, if you concentrate on only the riskiest investments, it's entirely possible, even likely, that you
will lose money.
For many people, it's best to manage risk by building a diversified portfolio that holds several different types of
investments. This approach provides the reasonable expectation that at least some of the investments will
increase in value over a period of time. So even if the return on other investments is disappointing, your overall
results may be positive.

Types of Investment Risk

There are many different types of investment risk. The two general types of risk are:
Losing money, which you can identify as investment risk
Losing buying power, which is inflation risk
It probably comes as no surprise that there are several different ways you might lose money on an investment.
To manage these risks, you need to know what they are.
Most investment risk is described as either systematic or nonsystematic. While those terms seem intimidating,
what they refer to is actually straightforward.

Systematic Risk
Systematic risk is also known as market risk and relates to factors that affect the overall economy or securities
markets. Systematic risk affects all companies, regardless of the company's financial condition, management,

or capital structure, and, depending on the investment, can involve international as well as domestic factors.
Here are some of the most common systematic risks:

Interest-rate risk describes the risk that the value of a security will go down because of changes
in interest rates. For example, when interest rates overall increase, bond issuers must offer higher
coupon rates on new bonds in order to attract investors. The consequence is that the prices of
existing bonds drop because investors prefer the newer bonds paying the higher rate. On the
other hand, there's also interest-rate risk when rates fall because maturing bonds or bonds that
are paid off before maturity must be reinvested at a lower yield.

Inflation risk describes the risk that increases in the prices of goods and services, and therefore
the cost of living, reduce your purchasing power. Let's say a can of soda increases from $1 to $2.
In the past, $2 would have bought two cans of soda, but now $2 can buy only one can, resulting in
a decline in the value of your money.
Inflation risk and interest rate risk are closely tied, as interest rates generally rise with inflation.
Because of this, inflation risk can also reduce the value of your investments. For example, to keep
pace with inflation and compensate for the loss of purchasing power, lenders will demand
increased interest rates. This can lead to existing bonds losing value because, as mentioned
above, newly issued bonds will offer higher interest rates. Inflation can go in cycles, however.
When interest rates are low, new bonds will likely offer lower interest rates.

Currency risk occurs because many world currencies float against each other. If money needs to
be converted to a different currency to make an investment, any change in the exchange rate
between that currency and yours can increase or reduce your investment return. You are usually
only impacted by currency risk if you invest in international securities or funds that invest in
international securities.
For example, assume that the current exchange rate of the U.S. dollar to British pound is $1=0.53
British pounds. If you invest $1,000 in a mutual fund that invests in the stock of British companies,
this will equal 530 pounds ($1,000 x 0.53 pounds = 530 pounds). Six months later, assume the
dollar strengthens and the exchange rate becomes $1=0.65 pounds. If the value of the fund does
not change, converting the original investment of 530 pounds into dollars will return only $815
(530 pounds/0.65 pounds = $815). Consequently, while the value of the mutual fund has not
changed in the local currency, a change in the exchange rate has devalued the original investment
of $1,000 into $815. On the other hand, if the dollar were to weaken, the value of the investment
would go up. So if the exchange rate changes to $1=0.43 pounds, the original investment of
$1,000 would increase to $1,233 (530 pounds/0.43 pounds = $1,233).
As with most risks, currency risk can be managed to a certain extent by allocating only a limited
portion of your portfolio to international investments and diversifying this portion across various
countries and regions.

Liquidity risk is the risk that you might not be able to buy or sell investments quickly for a price
that is close to the true underlying value of the asset. Sometimes you may not be able to sell the
investment at all if there are no buyers for it. Liquidity risk is usually higher in over-the-counter
markets and small-capitalization stocks. Foreign investments can pose liquidity risks as well. The

size of foreign markets, the number of companies listed, and hours of trading may limit your ability
to buy or sell a foreign investment.

Sociopolitical risk is the possibility that instability or unrest in one or more regions of the world

will affect investment markets. Terrorist attacks, war, and pandemics are just examples of events,
whether actual or anticipated, that impact investor attitudes toward the market in general and
result in system-wide fluctuations in stock prices. Some events, such as the September 11, 2001,
attacks on the World Trade Center and the Pentagon, can lead to wide-scale disruptions of
financial markets, further exposing investments to risks. Similarly, if you are investing overseas,
problems there may undermine those markets, or a new government in a particular country may
restrict investment by non-citizens or nationalize businesses.
Your chief defense against systematic risk, as you'll see, is to build a portfolio that includes investments that
react differently to the same economic factors. It's a strategy known as asset allocation. This generally involves
investing in both bonds and stocks or the funds that own them, always holding some of each. That's because
historical patterns show that when bonds as a groupthough not every bondare providing a strong return,
stocks on the whole tend to provide a disappointing return. The reverse is also true.
Bonds tend to provide strong returns, measured by the combination of change in value and investment
earnings, when investor demand for them increases. That demand may be driven by concerns about volatility
risk in the stock marketwhat's sometimes described as a flight to safety or by the potential for higher yield
that results when interest rates increase, or by both factors occurring at the same time.
That is, when investors believe they can benefit from good returns with less risk than they would be exposed to
by owning stock, they are willing to pay more than par value to own bonds. In fact, they may sell stock to invest
in bonds. The sale of stock combined with limited new buying drives stock prices down, reducing return.
In a different phase of the cycle, those same investors might sell off bonds to buy stock, with just the opposite
effect on stock and bond prices. If you owned both bonds and stocks in both periods, you would benefit from
the strong returns on the asset class that was in greater demand at any one time. You would also be ready
when investor sentiment changes and the other asset class provides stronger returns. To manage systematic
risk, you can allocate your total investment portfolio so that it includes some stock and some bonds as well as
some cash investments.

Nonsystematic Risk
Nonsystematic risk, in contrast to systematic risk, affects a much smaller number of companies or investments
and is associated with investing in a particular product, company, or industry sector.
Here are some examples of nonsystematic risk:

Management risk, also known as company risk, refers to the impact that bad management
decisions, other internal missteps, or even external situations can have on a company's
performance and, as a consequence, on the value of investments in that company. Even if you
research a company carefully before investing and it appears to have solid management, there is
probably no way to know that a competitor is about to bring a superior product to market. Nor is it
easy to anticipate a financial or personal scandal that undermines a company's image, its stock
price, or the rating of its bonds.

Credit risk, also called default risk, is the possibility that a bond issuer won't pay interest as

scheduled or repay the principal at maturity. Credit risk may also be a problem with insurance
companies that sell annuity contracts, where your ability to collect the interest and income you
expect is dependent on the claims-paying ability of the issuer.
One way to manage nonsystematic risk is to spread your investment dollars around, diversifying your portfolio
holdings within each major asset classstock, bonds, and casheither by owning individual securities or
mutual funds that invest in those securities. While you're likely to feel the impact of a company that crashes and
burns, it should be much less traumatic if that company's stock is just one among several you own.

Other Investment Risks

The investment decisions you makeand sometimes those you avoid makingcan expose you to certain risks
that can impede your progress toward meeting your investment goals.
For example, buying and selling investments in your accounts too frequently, perhaps in an attempt to take
advantage of short-term gains or avoid short-term losses, can increase your trading costs. The money you
spend on trading reduces the balance in your account or eats into the amount you have to invest. If you decide
to invest in something that's receiving a lot of media attention, you may be increasing the possibility that you're
buying at the market peak, setting yourself up for future losses. Or, if you sell in a sudden market downturn, it
can mean not only locking in your losses but also missing out on future gains.
You can also increase your investment risk if you don't monitor the performance of your portfolio and make
appropriate changes. For example, you should be aware of investments that have failed to live up to your
expectations, and shed them when you determine that they are unlikely to improve, using the money from that
sale for another investment.

Assessing Risk
It's one thing to know that there are risks in investing. But how do you figure out ahead of time what those risks
might be, which ones you are willing to take, and which ones may never be worth taking? There are three basic
steps to assessing risk:
Understanding the risk posed by certain categories of investments
Determining the kind of risk you are comfortable taking
Evaluating specific investments
You can follow this path on your own or with the help of one or more investment professionals, including
stockbrokers, registered investment advisers, and financial planners with expertise in these areas.

Step 1: Determining the Risk of an Asset Class

The first step in assessing investment risk is to understand the types of risk a particular category or group of
investmentscalled an asset classmight expose you to. For example, stock, bonds, and cash are
considered separate asset classes because each of them puts your money to work in different ways. As a
result, each asset class poses particular risks that may not be characteristic of the other classes. If you
understand what those risks are, you can generally take steps to offset those risks.

StockBecause shares of stock don't have a fixed value but reflect changing investor demand,
one of the greatest risks you face when you invest in stock is volatility, or significant price changes

in relatively rapid succession. In fact, in some cases, you must be prepared for stock prices to
move from hour to hour and even from minute to minute. However, over longer periods, the shortterm fluctuations tend to smooth out to show a gradual increase, a gradual decrease, or a
basically flat stock price.
For example, if a stock you bought for $25 a share dropped $5 in price in the following week
because of disappointing news about a new product, you suffered a 20% loss. If you had
purchased 200 shares at a cost of $5,000, your investment would now be worth just $4,000. If you
sold at that pointand there might have been good reason to do soyou would have lost $1,000,
plus whatever transaction fees you paid.
While some gains or losses of value seem logical, others may not, as may be the case when a
company announces increased earnings and its stock price drops. If you have researched the
investment before you made it and believe that the company is strong, you might hold on to the
stock. In that case, you might be rewarded down the road if the investment then increases in value
and perhaps pays dividends as well. While positive results aren't guaranteed, you can learn to
anticipate when patience is likely to pay off.

BondsBonds have a fixed valueusually $1,000 per bondor what is known as par or face
value. If you hold a bond until maturity, you will get that amount back, plus the interest the bond
earns, unless the issuer of the bond defaults, or fails to pay. In addition to the risk of default, you
also face potential market risk if you sell bonds before maturity. For example, if the price of the
bonds in the secondary marketor what other investors will pay to buy themis less than par,
and you sell the bonds at that point, you may realize a loss on the sale.
The market value of bonds may decrease if there's a rise in interest rates between the time the
bonds were issued and their maturity dates. In that case, demand for older bonds paying lower
rates decreases. If you sell, you must settle for the price you can get and potentially take that loss.
Market prices can also fall below par if the bonds are downgraded by an independent rating
agency because of problems with the company's finances.
Some bonds have a provision that allows the issuer to "call" the bond and repay the face value of
the bond to you before its maturity. Often there is a set "call date," after which a bond issuer can
pay off the bond. With these bonds, you might not receive the bond's original coupon rate for the
bond's entire term. Once the call date has been reached, the stream of a callable bond's interest
payments is uncertain, and any appreciation in the market value of the bond may not rise above
the call price. These risks are part of call risk.
Similar to when a homeowner seeks to refinance a mortgage at a lower rate to save money when
loan rates decline, a bond issuer often calls a bond after interest rates drop, allowing the issuer to
sell new bonds paying lower interest ratesthus saving the issuer money. The bond's principal is
repaid early, but the investor is left unable to find a similar bond with as attractive a yield. This is
known as reinvestment risk.

CashThe primary risk you face with cash investments, including U.S. Treasury bills and money
market mutual funds, is losing ground to inflation. In addition, you should be aware that money in
money market funds usually is not insured. While such funds have rarely resulted in investor
losses, the potential is always there.

Other asset classes, including real estate, pose their own risks, while investment products, such as annuities or
mutual funds that invest in a specific asset class, tend to share the risks of that class. That means that the risk
you face with a stock mutual fund is very much like the risk you face with individual stock, although most mutual
funds are diversified, which helps to offset nonsystematic risk.

Step 2: Selecting Risk

The second step is to determine the kinds of risk you are comfortable taking at a particular point in time. Since
it's rarely possible to avoid investment risk entirely, the goal of this step is to determine the level of risk that is
appropriate for you and your situation. Your decision will be driven in large part by:
Your age
Your goals and your timeline for meeting them
Your financial responsibilities
Your other financial resources
Age is one of the most important issues in managing investment risk. In general, the younger you are, the more
investment risk you can afford to take. The reason is simple: You have more time to make up for any losses
you might suffer in the short term.
You can use recent history to illustrate the validity of this point. Suppose two people, one 30 and the other 60,
had been similarly invested in October 2007 in portfolios overloaded with stocks. By March 2009, both would
almost certainly have lost substantial amounts of money. But while the younger person has perhaps 35 years to
recover and accumulate investment assets, the older person may be forced to delay retirement.
On the other hand, having a long time to recover from losses doesn't mean you can ignore the importance of
managing risk and choosing investments carefully and selling them when appropriate. The younger you are,
the more stock and stock fundsboth mutual funds and exchange traded fundsyou might consider buying.
But stock in a poorly run company, a company with massive debt and noncompetitive products, or a company
whose stock is wildly overpriced, probably isn't a good investment from a risk-management perspective, no
matter how old you are.
As you get closer to retirement, managing investment risk generally means moving at least some of your
assets out of more volatile stock and stock funds into income-producing equities and bonds. Determine what
percentage of your assets you want to transfer, and when. That way you won't have more exposure to a
potential downturn than you've prepared for. The consensus, though, is to include at least some investments
with growth potential (and therefore greater risk to principal) after you retire since you'll need more money if
you live longer than expected. Without growth potential, you're vulnerable to inflation.
Keep in mind that your attitude toward investment risk mayand probably shouldchange over time. If you
are the primary source of support for a number of people, you may be willing to take less investment risk than
you did when you were responsible for just yourself.
In contrast, the larger your investment base, the more willing you may be to take added risk with a portion of
your total portfolio. In a worst-case scenario, you could manage without the money you lost. And if your
calculated risk pays off, you may have even more financial security than you had before.

Many people also find that the more clearly they understand how investments work, the more comfortable they
feel about taking risk.
Step 3: Evaluating Specific Investments
The third step is evaluating specific investments that you are considering within an asset class. There are tools
you can use to evaluate the risk of a particular investmenta process that makes a lot of sense to follow both
before you make a new purchase and as part of a regular reassessment of your portfolio. It's important to
remember that part of managing investment risk is not only deciding what to buy and when to buy it, but also
what to sell and when to sell it.
For stocks and bonds, the place to start is with information about the issuer, since the value of the investment is
directly linked to the strength of the companyor in the case of certain bonds, the government or government
agencybehind them.

Company DocumentsEach public company must register its securities with the Securities and
Exchange Commission (SEC) and provide updated information on a periodic basis. ,The annual
report on Form 10-K contains audited financial statements as well as a wealth of detailed
information about the company, the people who run it, the risks of investing in the company, and
much more. Companies also submit to the SEC three additional quarterly reports called 10-Qs
and interim reports on Form 8-K. You can access these company filings using the SEC's EDGAR
database. While they aren't always exciting reading, SEC filings can be a treasure trove of
information about a company.
When you're reading a company's financial statements, don't skip over the footnotes. They often
contain red flags that can alert you to pending lawsuits, regulatory investigations, or other issues
that could have a negative impact on the company's bottom line.
The company's prospectus, especially the risk factors section, is another reliable tool to help you
evaluate the investment risk of a newly issued stock, an individual mutual fund or exchangetraded fund, or a REIT (real estate investment trust). The investment company offering the mutual
fund, ETF, or REIT must update its prospectus every year, including an evaluation of the level of
risk you are taking by owning that particular investment. You'll also want to look at how the fund,
ETF, or REIT has done in the past, especially if it has been around long enough to have
weathered a full economic cycle of market ups and downswhich might be as long as 10 years.
Keep in mind, however, that past results cannot predict future performance. Also verify that mutual
fund managers have not changed. In actively managed funds, it is the managers' picks that
determine returns and the level of risk the fund assumes. Past returns would not reflect a new
managers performance.

Rating ServicesIt's important to check what one or more of the independent rating services has
to say about specific corporate and municipal bonds that you may own or may be considering.
Each of the rating companiesincluding A.M. Best Company, Inc.; Dominion Bond Rating Service
Ltd. (also known as DBRS Ltd.); Egan-Jones Rating Company; Fitch, Inc.; Japan Credit Rating
Agency, Ltd.; LACE Financial Corp.; Moodys Investors Service; Rating and Investment
Information, Inc.; Realpoint, LLC (which focuses on commercial mortgage-backed securities); and
Standard & Poors Ratings Servicesevaluates the issuing company a little differently, but all of
them are focused on the issuer's ability to meet its financial obligations. The higher the letter grade

a rating company assigns, the lower the risk you are taking. But remember that ratings aren't
perfect and can't tell you whether or not your investment will go up or down in value.
Also remember that managing investment risk doesn't mean avoiding risk altogether. There might
be times when you include a lower-rated bond or bond fund in your portfolio to take advantage of
the higher yield it can provide.
Research companies also rate or rank stocks and mutual funds based on specific sets of criteria.
Brokerage firms that sell investments similarly provide their assessments of the probable
performance of specific equity investments. Before you rely on ratings to select your investments,
learn about the methodologies and criteria the research company uses in its ratings. You might
find some research companies' methods more useful than others'.

Take a Broad View

While the past performance of an investment never guarantees what will happen in the future, it is still an
important tool. For example, a historical perspective can alert you to the kinds of losses you should be
prepared foran awareness that's essential to managing your risk. A sense of the past can also tell you which
asset class or classes have provided the strongest return over time and what their average returns are.
Another way to assess investment risk is to stay tuned to what's happening in the world around you. For
example, investment professionals who learn that a company is being investigated by its regulator may decide
it's time to unload any of its securities that their clients own or that they hold in their own accounts. Similarly,
political turmoil in a particular area of the world might increase the risk of investing in that region. While you
don't want to overreact, you don't want to take more risk than you are comfortable with.

Investing to Minimize Risk

While some investors assume a high level of risk by going for the goldor looking for winnersmost people
are interested in minimizing risk while realizing a satisfactory return. If that's your approach, you might consider
two basic investment strategies: asset allocation and diversification.

Using Asset Allocation

When you allocate your assets, you decideusually on a percentage basiswhat portion of your total portfolio
to invest in different asset classes, usually stock, bonds, and cash or cash equivalents. You can make these
investments either directly by purchasing individual securities or indirectly by choosing funds that invest in
those securities.
As you build a more extensive portfolio, you may also include other asset classes, such as real estate, which
can also help to spread out your investment risk and so moderate it.
Asset allocation is a useful tool in managing systematic risk because different categories of investments
respond to changing economic and political conditions in different ways. By including different asset classes in
your portfolio, you increase the probability that some of your investments will provide satisfactory returns even
if others are flat or losing value. Put another way, you're reducing the risk of major losses that can result from
over-emphasizing a single asset class, however resilient you might expect that class to be.

For example, in periods of strong corporate earnings and relative stability, many investors choose to own stock
or stock mutual funds. The effect of this demand is to drive stock prices up, increasing their total return, which
is the sum of the dividends they pay plus any change in value. If investors find the money to invest in stock by
selling some of their bond holdings or by simply not putting any new money into bonds, then bond prices will
tend to fall because there is a greater supply of bonds than of investors competing for them. Falling prices
reduce the bonds' total return. In contrast, in periods of rising interest rates and economic uncertainty, many
investors prefer to own bonds or keep a substantial percentage of their portfolio in cash. That can depress the
total return that stock provides while increasing the return from bonds.
While you can recognize historical patterns that seem to indicate a strong period for a particular asset class or
classes, the length and intensity of these cyclical patterns are not predictable. That's why it's important to have
money in multiple asset classes at all times. You can always adjust your portfolio allocation if economic signs
seem to favor one asset class over another.
Financial services companies make adjustments to the asset mix they recommend for portfolios on a regular
basis, based on their assessment of the current market environment. For example, a firm might suggest that
you increase your cash allocation by a certain percentage and reduce your equity holdings by a similar
percentage in a period of rising interest rates and increasing international tension. Companies frequently
display their recommended portfolio mix as a pie chart, showing the percentage allocated to each asset class.
Modifying your asset allocation modestly from time to time is not the same thing as market timing, which
typically involves making frequent shifts in your portfolio holdings in anticipation of which way the markets will
turn. Because no one knows what will happen, this technique rarely produces positive long-term results.

Using Diversification
When you diversify, you divide the money you've allocated to a particular asset class, such as stocks, among
various categories of investments that belong to that asset class. These smaller groups are called subclasses.
For example, within the stock category you might choose subclasses based on different market capitalizations:
some large companies or funds that invest in large companies, some mid-sized companies or funds that invest
in them, and some small companies or funds that invest in them. You might also include securities issued by
companies that represent different sectors of the economy, such as technology companies, manufacturing
companies, pharmaceutical companies, and utility companies.
Similarly, if you're buying bonds, you might choose bonds from different issuersthe federal government, state
and local governments, and corporationsas well as those with different terms and different credit ratings.
Diversification, with its emphasis on variety, allows you to manage nonsystematic risk by tapping into the
potential strength of different subclasses, which, like the larger asset classes, tend to do better in some periods
than in others. For example, there are times when the performance of small company stock outpaces the
performance of larger, more stable companies. And there are times when small company stock falters.
Similarly, there are periods when intermediate-term bondsU.S. Treasury notes are a good exampleprovide
a stronger return than short- or long-term bonds from the same issuer. Rather than trying to determine which
bonds to buy at which time, there are different strategies you can use.

For example, you can buy bonds with different terms, or maturity dates. This approach, called a barbell
strategy, involves investing roughly equivalent amounts in short-term and long-term bonds, weighting your
portfolio at either end. That way, you can limit risk by having at least a portion of your total bond portfolio in
whichever of those two subclasses is providing the stronger return.
Alternatively, you can buy bonds with the same term but different maturity dates. Using this strategy, called
laddering, you invest roughly equivalent amounts in a series of fixed-income securities that mature in a rolling
pattern, perhaps every two years. Instead of investing $15,000 in one note that will mature in 10 years, you
invest $3,000 in a note maturing in two years, another $3,000 in a note maturing in four years, and so on. This
approach helps you manage risk in two ways:
If rates drop just before the first note matures, you'll have to invest only $3,000 at the new lower

rate rather than the full $15,000. If rates behave in traditional fashion, they will typically go up
again at some point in the ten-year span covered by your ladder.
If you need money in the short term for either a planned or unplanned expense, you could use the
amount of the maturing bond to meet that need without having to sell a larger bond in the
secondary market.

How Much Diversification?

In contrast to a limited number of asset classes, the universe of individual investments is huge. Which raises
the question: How many different investments should you own to diversify your portfolio broadly enough to
manage investment risk? Unfortunately, there is no simple or single answer that is right for everyone. Whether
your stock portfolio includes six securities, 20 securities, or more is a decision you have to make in consultation
with your investment professional or based on your own research and judgment.
In general, however, the decision will depend on how closely the investments track one another's returnsa
concept called correlation. For example, if Stock A always goes up and down the same amount as Stock B,
they are said to be perfectly correlated. If Stock A always goes up the same amount that Stock B goes down,
they are said to be negatively correlated. In the real world, securities often are positively correlated with one
another to varying degrees. The less positively correlated your investments are with one another, the better
diversified you are.
Building a diversified portfolio is one of the reasons many investors turn to pooled investmentsincluding
mutual funds, exchange traded funds, and the investment portfolios of variable annuities. Pooled investments
typically include a larger number and variety of underlying investments than you are likely to assemble on your
own, so they help spread out your risk. You do have to make sure, however, that even the pooled investments
you own are diversifiedfor example, owning two mutual funds that invest in the same subclass of stocks
won't help you to diversify.
With any investment strategy, it's important that you not only choose an asset allocation and diversify your
holdings when you establish your portfolio, but also stay actively attuned to the results of your choices. A critical
step in managing investment risk is keeping track of whether or not your investments, both individually and as a
group, are meeting reasonable expectations. Be prepared to make adjustments when the situation calls for it.

Measuring Risk

You can't measure risk by putting it on a scale or lining it up against a yardstick. One way to put the risk of a
particular investment into contextcalled the risk premium in the case of stock or the default premium in the
case of bondsis to evaluate its return in relation to the return on a risk-free investment.
Is there actually a risk-free investment? The one that comes closest is the 13-week U.S. Treasury bill, also
referred to as the 91-day bill. This investment serves as a benchmark for evaluating the risk of investing in
stock for two reasons:
The shortness of the term, which significantly reduces reinvestment risk.
The backing of the U.S. government, which virtually eliminates default, or credit risk
The long-term Treasury bond is the risk-free standard for measuring the default risk posed by a corporate bond.
While both are vulnerable to inflation and market risk, the Treasury bond is considered free of default risk.

Modern Portfolio Theory

In big-picture terms, managing risk is about the allocation and diversification of holdings in your portfolio. So
when you choose new investments, you do it with an eye to what you already own and how the new investment
helps you achieve greater balance. For example, you might include some investments that may be volatile
because they have the potential to increase dramatically in value, which other investments in your portfolio are
unlikely to do.
Whether you're aware of it or not, by approaching risk in this wayrather than always buying the safest
investmentsyou're being influenced by what's called modern portfolio theory, or sometimes simply portfolio
theory. While it's standard practice today, the concept of minimizing risk by combining volatile and price-stable
investments in a single portfolio was a significant departure from traditional investing practices.
In fact, modern portfolio theory, for which economists Harry Markowitz, William Sharpe, and Merton Miller
shared the Nobel Prize in 1990, employs a scientific approach to measuring risk, and by extension, to choosing
investments. It involves calculating projected returns of various portfolio combinations to identify those that are
likely to provide the best returns at different levels of risk.

Evaluating Performance
Introduction
Choosing investments is just the beginning of your work as an investor. As time goes by, you'll need to monitor
the performance of these investments to see how they are working together in your portfolio to help you
progress toward your goals. Generally speaking, progress means that your portfolio value is steadily
increasing, even though one or more of your investments may have lost value.
On the other hand, if your investments are not showing any gains or your account value is slipping, you'll have
to determine why and decide on your next move. In addition, because investment markets change all the time,
you'll want to be alert to opportunities to improve your portfolio's performance, perhaps by diversifying into a

different sector of the economy or allocating part of your portfolio to international investments. To free up
money to make these new purchases, you may want to sell individual investments whose performance has
been disappointing while not abandoning the asset allocation you've selected as appropriate.
To assess how well your investments are doing, you'll need to consider several different ways of measuring
performance. The measures you choose will depend on the exact information you're looking for and the types
of investments you own. For example, if you have a stock that you hope to sell in the short term at a profit, you
may be most interested in whether its market price is going up, has started to slide, or seems to have reached
a plateau. On the other hand, if you're a buy-and-hold investor more concerned about the stock's value 15 or
20 years in the future, you're likely to be more interested in whether it has a pattern of earnings growth and
seems to be well positioned for future expansion.
In contrast, if you're a conservative investor or you're approaching retirement, you may be primarily interested
in the income your investments provide. You may want to examine the interest rate your bonds and certificates
of deposit are paying in relation to current market rates and evaluate the yield from stock and mutual funds you
bought for the income they provide. Of course, if market rates are down, you may be disappointed with your
reinvestment opportunities as your existing bonds mature. You might even be tempted to buy investments with
a lower rating in expectation of getting a potentially higher return. In this case, you want to use a performance
measure that assesses the risk you take to get the results you want.
In measuring investment performance, you want to be sure to avoid comparing apples to oranges. Finding and
applying the right evaluation standards for your investments is important. If you don't, you might end up
drawing the wrong conclusions. For example, there's little reason to compare yield from a growth mutual fund
with yield from a Treasury bond, since they don't fulfill the same role in your portfolio. Instead, you want to
measure performance for a growth fund by the standards of other growth investments, such as a growth mutual
fund index or an appropriate market index.

Yield
Yield, which is typically expressed as a percentage, is a measure of the income an investment pays during a
specific period, typically a year, divided by the investment's price. All bonds have yields, as do dividend-paying
stocks, most mutual funds, and bank accounts including certificates of deposit (CDs).

Yields on Bonds
When you buy a bond at issue, its yield is the same as its interest rate or coupon rate. The rate is figured by
dividing the yearly interest payments by the par value, usually $1,000. So if you're collecting $50 in interest on
a $1,000 bond, the yield is 5%.
However, bonds you buy after issue in the secondary market have a yield different from the stated coupon rate
because the price you pay is different from the par value. Bond yields go up and down depending on the credit
rating of the issuer, the interest rate environment and general market demand for bonds. The yield for a bond
based on its price in the secondary market is known as the bond's current yield.
For instance, a bond with a par value of $1,000 with a 6% coupon rate might be sold in the market at a current
yield of 5%. The bond itself keeps paying 6% of $1,000 every year, or $60. But because interest rates have
fallen to 5% and newly issued bonds pay a lower coupon rate, a bond paying 6% is more attractive to investors.

If you want to buy that bond, you will likely pay a premiumsay, $1,200 instead of $1,000. If you divide the
fixed annual income ($60) by the new market price ($1,200), you get the current yield (5%).
If you intend to hold a fixed-rate bond to maturity, the bond's coupon yield might be the only thing that matters
to you since the coupon yield doesn't change after issue. However, current yield can matter a great deal if
you're considering selling a bond before its maturity date. That's because bond yields go down when bond
prices go up. As a result, you can often sell a bond you bought at the time of issue for a profit when the current
yield is lower than the coupon rate because at that point the market price is higher than the price you paid.
Current yield might matter to you as well if the yield you're getting on older bonds is lower than the current
yields of more recently issued bonds. In that case, you might consider selling your bonds even at a loss if you'd
like to reinvest to get higher yields while they're available.
There are also two more complex and complete measures of bond yield that take other factors, such as
reinvested interest and the impact of having your bond called, into account.
For example, yield-to-maturity (YTM), which is sometimes described as the most accurate measure of a bond's
yield, calculates, among other factors, the effect of compound interest on what a bond is worth. Specifically,
YTM assumes that you reinvest every interest payment you receive in another bond paying the same rate.
While this may be difficult to do in practice, since interest rates change all the time, YTM nonetheless provides
a longer-term view of yield that can help you choose among different bond investments if you aren't simply
spending the income that your bonds provide. There are a number of online calculators that you can use to
help figure YTM on a particular bond, and your broker or other investment professional can provide YTM
figures as wellalong with a fuller explanation of how to use the information.
Similarly yield-to-first-call helps you evaluate the yield a callable bond would actually provide if the bond issuer
chose to call, or redeem, the bond on the first date that was possible. (When a bond is callable, the issuer has
the right to repay the principal and stop interest payments on dates that are set at the time of issue.) If a bond
paying higher than current rates is calledas is often the caseyou not only lose that source of income but
must often reinvest at a lower yield. So the yield-to-first-call can be a useful tool as you compare bonds you are
considering. For example, you might prefer a bond whose initial call date is further in the future or one without a
call provision.

Yields on Other Investments

If your assets are in conventional certificates of deposit (CDs), figuring your yield is easy. Your bank or other
financial services firm will provide not only the interest rate the CD pays, but its annual percentage yield (APY).
In most cases, that rate remains fixed for the CD's term.
For a stock, yield is calculated by dividing the year's dividend by the stock's market price. You can find that
information online, in the financial pages of your newspaper and in your brokerage statement. Of course, if a
stock doesn't pay a dividend, it has no yield. But if part of your reason for investing is to achieve a combination
of growth and income, you may have deliberately chosen stocks that provided a yield at least as good as the
market average.
However, if you're buying a stock for its dividend yield, one thing to be aware of is the percentage of earnings
that the issuing company is paying to its shareholders. Sometimes stocks with the highest yield have been

issued by companies that may be trying to keep up a good face despite financial setbacks. Sooner or later,
however, if a company doesn't rebound, it may have to cut the dividend, reducing the yield. The share price
may suffer as well. Also remember that dividends paid out by the company are funds that the company is not
using to reinvest in its businesses.

Return
Your investment return is all of the money you make or lose on an investment. To find total return, generally
considered the most accurate measure of return, you add the change in valueup or downfrom the time you
purchased the investment to all of the income you collected from that investment in interest or dividends. To
find percent return, you divide the change in value plus income by the amount you invested.
Here's the formula for that calculation:
(Change in value + Income) Investment amount = Percent return
For example, suppose you invested $2,000 to buy 100 shares of a stock at $20 a share. While you own it, the
price increases to $25 a share and the company pays a total of $120 in dividends. To find your total return,
you'd add the $500 increase in value to the $120 in dividends and to find percent return you divide by $2,000,
for a result of 31%.
That number by itself doesn't give you the whole picture, though. Since you hold investments for different
periods of time, the best way to compare their performance is by looking at their annualized percent return. To
find that number, you divide your total percent return by the number of years you've held the investment.
You can use this formula to find the result:
Total percent return Years investment held = Annualized percent return
For example, if you've had a $620 total return on a $2,000 investment over the course of three years, you
would divide your total percent return of 31% return by three, resulting in an annualized return of 10.3%.
If the price of the stock drops during the period you own it, and you have a loss instead of a profit, you do the
calculation the same way but your return may be negative if income from the investment hasn't offset the loss
in value.
Remember that you don't have to sell the investment to calculate your return. In fact, figuring return may be
one of the factors in deciding whether to keep a stock in your portfolio or trade it in for one that seems likely to
provide a stronger performance.
In the case of bonds, if you're planning to hold a bond until maturity you can calculate your total return by
adding the bond income you'll receive during the term to the principal that will be paid back at maturity. If you
sell the bond before maturity, in figuring your return you'll need to take into account the interest you've been
paid plus the amount you receive from the sale of the bond, as well as the price you paid to purchase it.
There are several things to keep in mind when you evaluate return, however:

1.

To be sure your calculation is accurate, it's important to include the transaction fees you pay when you
buy your investments. If you're calculating return on actual gains or losses after selling the investment,
you should also subtract the fees you paid when you sold.

2.

If you reinvest your earnings to buy additional shares, as is often the case with a mutual fund and is
always the case with a stock dividend reinvestment plan, calculating total return is more complicated.
That's one reason to use the total return figures that mutual fund companies provide for each of their
funds over various time periods, even if the calculation is not exactly the same result you'd find if you did
the math yourself.
One reason it might differ is that the fund calculates total return on an annual basis. If you made a major
purchase in May, just before a major market decline, or sold just before a market rally, your result for the
year might be less than the fund's annual total return.

3.

It's also important to consider after-tax returns in measuring performance. For example, interest
income from some federal or municipal bonds may be tax-exempt. In this case, you might earn a lower
rate of interest but your return could actually be greater than the return on taxable bonds paying a higher
interest rate.
After-tax returns are especially important in your taxable accounts, since every year the amount you can
reinvest is reduced by the taxes you pay, and the effect of smaller reinvestment amounts increases with
timea kind of compounding, but in reverse. This phenomenon is sometimes described as opportunity
cost. That's one reason you may want to emphasize investments that don't pay much current income in
your taxable accounts. In tax-deferred accounts, taxes are less of an issue since no tax is due when the
earnings are added to your account, though you will owe tax when you withdraw.

4.

With investments you hold for a long time, inflation may also play a big role in calculating your return.
Inflation means your money loses value over time. It's the reason that a dollar in 1950 could buy a lot
more than a dollar in 2010. The calculation of return that takes inflation into account is called real return.
You'll also see inflation-adjusted dollars called real dollars. To get real return, you subtract the rate of
inflation from your percentage return. In a year in which your investments returned 10% but inflation sent
prices rising 3%, your real return would be only 7%.

As you gain experience as an investor, you can learn a lot by comparing your returns over several years to see
when different investments had strong returns and when the returns were weaker. Among other things, year-byyear returns can help you see how your various investments behaved in different market environments. This
can also be a factor in what you decide to do next.
However, unless you have an extremely short-term investment strategy or one of your investments is extremely
time-sensitive, it's generally a good idea to make investment decisions with a view to their long-term impact on
your portfolio rather than in response to ups and downs in the markets.

Capital Gains and Losses

Investments are also known as capital assets. If you make money by selling one of your capital assets for a
higher price than you paid to buy it, you have a capital gain. In contrast, if you lose money on the sale, you
have a capital loss. Capital gains and losses may be a major factor in your portfolio performance, especially if
you are an active investor who buys and sells frequently.

In general, capital gains are taxable, unless you sell the assets in a tax-free or tax-deferred account. But the
rate at which the tax is calculated depends on how long you hold the asset before selling it.
Profits you make by selling an asset you've held for over a year are considered long-term capital gains and are
taxed at a lower rate than your ordinary income. However, short-term gains from selling assets you've held for
less than a year don't enjoy this special tax treatment, so they're taxed at the same rate as your ordinary
income. That's one reason you may want to postpone taking gains, when possible, until they qualify as longterm gains.
With some investments, such as stocks you own outright, you can determine when to buy and sell. You will owe
taxes only on any capital gains you actually realizemeaning you've sold the investment for a profit. And even
then you may be able to offset these gains if you sold other investments at a loss. With other investments,
capital gains can become more complicated.
Mutual funds, for example, are different from stocks and bonds when it comes to capital gains. As with a stock
or a bond, you will have to pay either short- or long-term capital gains taxes if you sell your shares in the fund
for a profit. But even if you hold your shares and do not sell, you will also have to pay your share of taxes each
year on the fund's overall capital gains. Each time the managers of a mutual fund sell securities within the fund,
there's the potential for a taxable capital gain (or loss). If the fund has gains that cannot be offset by losses,
then the fund must, by law, distribute those gains to its shareholders.
If a fund has a lot of taxable short-term gains, your return is reduced, which is something to keep in mind in
evaluating investment performance. You can look at a mutual fund's turnover ratio, which you can find in a
mutual fund's prospectus, to give you an idea of whether the fund might generate a lot of short-term gains. The
turnover ratio tells you the percentage of a mutual fund's portfolio that is replaced through sales and purchases
during a given time periodusually a year.
Unrealized gains and lossessometimes called paper gains and lossesare the result of changes in the
market price of your investments while you hold them but before you sell them. Suppose, for example, the price
of a stock you hold in your portfolio increases. If you don't sell the stock at the new higher price, your profit is
unrealized because if the price falls later, the gain is lost. Only when you sell the investment is the gain realized
in other words, it becomes actual profit.
This is not to say that unrealized gains and losses are unimportant. On the contrary, unrealized gains and
losses determine the overall value of your portfolio and are a large part of what you assess in measuring
performance, along with any income generated by your investments. In fact, many discussions of performance
in the financial press, especially regarding stocks, focus entirely on these price changes over time.

Tracking Performance
One of the most important things you can do when tracking your investments is to set the right expectations. A
percentage return that could be considered strong in one market environment might be considered weak in
another. There's no single, unchanging standardfor instance, that all stocks should return a specific
percentage each year. Instead, performance standards are moving targets. That's why it's important to judge
an investment in the context of your portfolio strategy as well as against the appropriate standard or
benchmark.

Using Benchmarks
Generally, when people refer to the stock market's performance, they're actually referring to the performance of
an index or average that tracks representative stocks or bonds. The index serves as an indicator of the overall
direction of the market as a whole, or of particular market segments. Investors use these indexes and averages
as benchmarks, to see how particular investments or combinations of investments measure up.
For example, when a mutual fund manager says the fund's objective is to "beat the market," it generally means
the manager attempts to assemble a portfolio that has a stronger return than a particular benchmark. In
contrast, the objective of index mutual funds is to replicate the performance of the market they track and the
fund managers typically structure their portfolios by purchasing all of or a sample of the investments that make
up their chosen benchmark.
Though the terms "index" and "average" are sometimes used interchangeably, they're actually quite different
because of the way they're calculated. Averages add up all the prices of the investments included in their roster
and divide by the number of investments. Indexes, on the other hand, set a base starting value for their
holdings at some point and then calculate percentage changes from that base. The best-known market
measurement, the Dow Jones Industrial Average, is called an average but it's actually calculated using a blend
of the two approaches.
Some of the more frequently cited indexes and averages are these:
Dow Jones Industrial Average. The most widely cited measure of the market, the DJIA tracks
the performance of 30 stocks of large, well-known companies.

S&P 500 Index. Standard and Poor's index tracks 500 stocks of large-company U.S. companies
and is the basis for several index mutual funds and exchange-traded funds.

Russell 2000. This index tracks 2,000 small-company stocks and serves as the benchmark for
that component of the overall market.

Dow Jones Wilshire 5000. Tracking over 5,000 stocks, the Wilshire covers all the companies
listed on the major stock markets, including companies of all sizes across all industries.

Lipper Fund Indexes. Lipper calculates several indexes tracking different categories of mutual
funds, such as Growth, Core, or Value funds.

Barclays Capital Aggregate Bond Index (formerly Lehman Brothers Aggregate Bond Index).

This is a composite index that combines several bond indexes to give a picture of the entire bond
market.
When choosing a benchmark, it's important to know what you're comparing your investment against and what
the comparison means. For example, when you compare a stock's performance to the performance of the S&P
500, you're comparing it to U.S. large-company stocks. When you compare it to the Russell 2000, you're
comparing it to small-company stocks. When you compare it to the Dow Jones Wilshire 5000, you're viewing it
against the field of all listed U.S. stocks.
Which benchmark should you use? In general, if you want to know how an investment is performing you look at
the benchmark that tracks investments that are most like it.

For example, it makes sense to compare the performance of a large-company stock or large-company mutual
fund to large-company stock indexes, and small-company stocks or funds to small-company stock indexes. If
you're concerned with how your stock is faring against others in its industry, you compare it against an industry
benchmark. Comparing an investment to a vastly different benchmark may give you some information. For
example, you may discover that your small-company stock fund isn't performing as well as the total stock
market.
But that information might be of limited use, especially if small-company stock funds are an important part of
your portfolio mix that you have included because they perform differently from the total stock market, and so
you could reduce the risk of your portfolio. Instead, if you compare your small-cap stock fund against a smallcap index, and your fund is actively managed, you'll get a sense of whether your fund manager is performing
well after the fees the fund is charging, or if you might be better off investing in a passively managed small-cap
index fund.
There are, however, valid reasons for making cross-category comparisons when evaluating the performance of
your entire portfolio as opposed to a single investment. For instance, you may be curious about whether your
portfolio of stocks is doing as well as a mutual fund that has an investment objective similar to yours. Or, you
may be considering changing your strategy by shifting some of your money to a different subclass of
investment. In that case, you could compare the returns for your current portfolio to the benchmark for the class
of investments you're considering.
You should always keep in mind, though, that you can't count on the market to behave the same way in the
future as it has in the past. These comparisons, while a helpful way to evaluate your investment options, should
not be considered predictors of future performance.
Another important rule to keep in mind when measuring investment performance against benchmarks is to
examine returns over longer periods of timeideally, several years versus one year or one quarter. Short-term
results can be misleading because a particular company or fund may have a banner year or suffer a slump in
comparison to its benchmark. But these results may be due to one-time events, which may be unusual and not
a fair representation of the investment's performance over time.
On the other hand, the market as a whole could have an exceptionally good or bad quarter in the midst of
what's known as a sideways market, where there's little long-term change. Benchmarking against an atypical
quarter could give you a skewed view of actual performance of a particular investment.
Finally, you'll want to keep in mind that not all benchmarks are indexes or averages. For example, the standard
benchmark for long-term bond yields is the yield of the 30-year U.S. Treasury bond.

Reading Your Statements

Keeping track of your investments is important, but you might wonder how often you should check on them.
Some investors look at their portfolio values daily or weekly, and if you own extremely volatile investments and
have a short-term investment strategy, that can be a good idea.
However, if your strategy is long-term, it's important not to get overly concerned with short-term fluctuations in
value, since trading based on short-term volatility could sidetrack your long-term goals and cost you money in

taxes and transaction fees. Instead, you may want to check performance monthly or quarterly on the
statements you receive from your investment accounts.
It's important to read your statements before you file them away, both because you need to know how you're
doing in relation to your goals and because you need to see whether your statement is accurate, with all your
trades accounted for and recorded correctly.
If you have all of your investments in accounts with a single financial services company, you may get a
consolidated statement containing information about all your accounts. However, if you have accounts at
several firms, or if you have both tax-deferred and taxable accounts, you may need to look at several different
statements to get a complete picture of your total portfolio performance.
In addition to sending you regular statements, many brokerage houses give you 24-hour access to your
account information online, so you can look up the latest values for your holdings any time you like. In addition,
you may be able to access your account information by phone.
Your monthly or quarterly statement will generally tell you the current market value of your investments as of
the closing date, the change in value since the last statement, and the year-to-date change. You'll also see a
record of your transactions for the previous period, including purchases and sales, and information on
dividends, bond income, and mutual fund distributions, as well as realized and unrealized capital gains and
losses. Some statements also show projected earnings and provide pie charts showing how your portfolio is
allocated.
Most likely, your returns will fluctuate throughout the year, reflecting both the fortunes of your particular
investments and the ups and downs of the overall market. This is where benchmarks can come in handy, so
you can compare the returns in your statement with the returns of other investments. For example, if the market
is strong but your portfolio value is flat, that might be a sign for you to look more closely at your individual
investments. Yet if your portfolio slumps when markets everywhere are falling, your portfolio may simply be
reflecting market conditions.

Using Research
Another way to evaluate your investments' ongoing performance is through analyst research. Analysts at
brokerage firms and at independent research firms look not only at current performance, but also at future
potential to give you a picture of an investment's strengths and weaknesses in the context of the wider market.
Analysts also recommend actions based on performance. The actual language analysts use may vary, but in
general, they recommend that you buy, hold, or sell an investment.
Whether you actually buy or sell based on an analyst's recommendation is up to you. Among other things, you
should decide whether buying or selling a particular investment is in line with your individual investing strategy.
You should always look at analyst research in the context of your own goals and your own expectations for
performance.
Furthermore, analysts don't always agree with each other. As a general rule, they also tend to give more
positive than negative recommendations. If you're using professional research, it may be a good idea to read
the recommendations of several analysts to help you determine how an investment is performing and whether
you should make any changes to your portfolio.

With bonds, analysts don't give buy, hold, and sell ratings. Instead, they provide credit ratings, which measure
an issuer's financial ability to meet its debt obligations. If you've bought highly rated bonds, called investmentgrade bonds, you'll rarely find the issuer's credit rating changing dramatically enough to affect your investment's
return. However, unless you've bought U.S. Treasury debt, a lowered credit rating is always a possibility.
To keep current with your investments, you should also look at the reports issued by companies relating to their
financial situation and future prospects. For example, companies that issue public stock must provide
shareholders with annual reports, and they must also file annual reports with audited financial statements,
known as 10-Ks, with the Securities and Exchange Commission, which you can find online using the SEC's
EDGAR database.
Companies also file quarterly reports with the SEC. You can use these reports to evaluate corporate
performance in more depth than you can manage by simply checking prices and yields online. You might also
want to keep in mind that the annual report that companies send to shareholders, while easier to read than the
10-K, is usually designed to emphasize the positive aspects. The 10-K is plainer and more direct, and may
provide insights you may overlook in an annual report.
Mutual funds also provide semi-annual and annual reports to help you track the fund's progress. The reports
give you information about returns and fees, plus a list of the fund's holdings, so you can check the underlying
investments that the portfolio manager has chosen. By comparing these reports over time, you can see how
the fund's holdings have changed. You should also compare the fund's results to the appropriate benchmark, to
see how it fares next to its peers. Most mutual fund reports provide this information, often in the form of a
comparison chart.
In addition, it's very easy to set up online news trackers that will email you stories on the companies, funds,
industries, and markets that you're interested in. This way, you can be on the lookout for news that might have
an impact on your investments, and provide you time to analyze the situation and decide what changes, if any,
to make to your portfolio.

Auction Rate Securities: What Happens When Auctions Fail

Auction rate securities (ARS) refer to long-term investments that have a short-term twist: the interest rates or
dividends they pay are reset at frequent intervals through auctions, which typically occur every 7, 14, 28, or 35
days. Usually, these auctions also provide the primary source of liquidity to ARS investors who wish to sell their
investment.
Recent developments in the credit market have led many of the ARS auctions to fail, which may prevent
existing investors from selling their ARS holdings. As a result, ARS investors who treated these securities as a
ready source of cash are finding themselves short on readily available funds. In response, some issuers of

ARS have announced redemptions of shares, generally at par value. In some cases, however, the issuer only
offers to redeem some but not all of the outstanding shares. This may leave some investors with holdings they
are unable to liquidate.
Loss of liquidity does not mean that you cannot ever get your money back. But, if you need money in a hurry,
any illiquid investment can be a financial hardship. We are publishing this Alert to let investors know about
some of the options available to them in the event their ARS investment becomes illiquid. We also want
investors to understand what can happen when an issuer makes a call for a partial redemption.
What are ARS?
Investors who purchase ARS are typically seeking a cash-like investment that pays a higher yield than money
market mutual funds or certificates of deposit. There generally are two types of ARS, bonds with long-term
maturities (20 to 30 years) and preferred shares with a cash dividend. Both the interest on the bonds and the
dividend on the preferred shares are variable based on rates that are set through auctions for a specified short
term usually measured in days7, 14, 28, or 35. This is unlike a traditional bond that is issued with an interest
rate set for the life of the bond or preferred stock that specifies the dividend rate for the life of the shares.
Auction rate bonds are issued by municipalities, student-loan authorities, museums and many others. Some
auction rate bonds, such as those issued by municipalities, may offer certain tax advantages. Auction rate
preferred shares are issued by closed-end funds.
How Can ARS Become Illiquid?
Liquidity issues arise when an auction fails. To understand how an auction can fail, it helps to know how ARS
auctions work. Before each auction, current ARS investors can request either to sell their ARS, to hold their
existing position at a specified interest or dividend rate, or to hold at whatever new interest rate or dividend the
auction establishes. The size of any given auction will depend on how many current ARS investors want to sell
and how many want to hold at a certain minimum rate.
Potential purchasers then indicate how much they wish to buy and what interest rate or dividend they are
willing to accept. Bids, or buy orders, with the lowest interest or dividend rates get accepted first, followed by
successively higher bids until all the securities available for auction are sold. The highest rate accepted in the
auctionthe "clearing rate"then becomes the interest or dividend rate that applies to all the ARS until the
next auction.
ARS auctions can fail when supply exceeds demandin other words, when there are not enough bids to
purchase all the securities offered for sale in the auction. When an ARS auction fails, current investors will
continue to hold their securities and will generally receive an interest rate or dividend set above market rates for
the next holding period-up to any maximum disclosed in the offering documents.
Unfortunately, due to recent developments in the credit marketincluding downgrades in the credit ratings of
bond issuers and bond insurersa significant number of auctions have failed, leaving some investors who
counted on immediate access to their funds wondering about their options.
What Alternatives are Available?
ARS investors should read the offering documents carefully to determine what, if any, provisions the issuer has
made in anticipation of illiquidity and failed auctions. Some issuers of bonds or preferred shares may have

reserved the right to convert the ARS into a fixed or variable rate security or to call the instrument at a certain
price.
ARS investors who want to liquidate their holdingsbut cannot because of failed auctionshave a variety of
options. These include:

Continuing to Hold: If you have no need to access the monies invested in the ARS, you may
want to consider whether that above-market rate is enough for you to continue holding until the
next auction, which generally will be less than a month away. There is, of course, a chance that
subsequent auctions will fail as well. As noted above, the issuer may be authorized to call the
instrument or convert it into a fixed or variable rate security.

Borrowing on Margin: Some firms are offering to lend customers money to help them meet their
cash flow needs. This may not be for everyone. For example, you should be aware that the
interest rate charged on these loans may exceed the yield you are getting on the underlying
security. Also, borrowing against a tax-exempt security may cause you to lose the ability to deduct
from your taxes the interest or a portion of the interest on your margin loan. If you're considering
this option, be sure you understand the general considerations that apply to any margin loan,
notably:

Your firm can force the sale of securities in your accounts to meet a margin
call. If the ARS in your account falls below the maintenance margin requirements
under the lawor the firm's higher "house" requirementsyour firm can sell the
securities in your accounts to cover the margin deficiency. You will also be
responsible for any shortfall in the accounts after such a sale.

Your firm can sell your securities without contacting you. Some investors
mistakenly believe that a firm must contact them first for a margin call to be valid.
This is not the case. Most firms will attempt to notify their customers of margin calls,
but they are not required to do so. Even if you're contacted and provided with a
specific date to meet a margin call, your firm may decide to sell some or all of your
securities before that date without any further notice to you. For example, your firm
may take this action because the market value of your securities has continued to
decline in value.

You are not entitled to choose which securities or other assets in your
accounts are sold. There is no provision in the margin rules that gives you the right
to control liquidation decisions. Your firm may decide to sell any of the securities that
are collateral for your margin loan to protect its interests.

Your firm can increase its "house" maintenance requirements at any time and
is not required to provide you with advance notice. These changes in firm policy
often take effect immediately and may cause a house call. If you don't satisfy this
call, your firm may liquidate or sell securities in your accounts.

You are not entitled to an extension of time on a margin call. While an extension
of time to meet a margin call may be available to you under certain conditions, you
do not have a right to the extension.

Liquidating other investments: If you have immediate cash needs, you might also consider
selling other securities in your portfolio. If you're weighing this option, be sure to think about the
following factors:

The total transaction costs that you would incur in liquidating a particular
position. For instance, if you liquidate certain class shares of mutual funds or
insurance linked products prior to a defined date, you could be assessed a deferred
sales charge (also known as a back-end load or a surrender charge). Other costs to
look out for include commissions, fees and mark-downs.

Whether the sale will trigger adverse tax consequences. Withdrawing funds from
401(k) plans, IRA accounts or other tax deferred accounts can generate immediate
taxable income and penalties. Selling securities can also require that you recognize
unrealized gains, which is a particularly important consideration if your tax basis in
the investment is low.

How the liquidation will impact the balance of your portfolio. Just like securities
purchases, sales should be made after considering your entire portfolio and
investment objective.

Before you make such decisions, you should give serious consideration to consulting with a
financial services professional and an accountant or tax advisor.

Selling in the Secondary Market: You may wish to consider selling in the secondary market to a

third party. Recent events, however, have caused secondary market transactions to become
more difficult to complete. Your brokerage firm is not required to purchase your ARS in the
secondary market, so you must find out whether it may be willing to do so. Your broker owes you
a duty to obtain best execution, but you should keep in mind that selling outside of the auction
process may make it harder to determine whether you are getting a fair value, and may result in
your getting a lower price. In addition, you need to factor in the costs or fees associated with a
transaction completed outside the auction.
What Happens When an Issuer Redeems ARS?
To address failed auctions, some issuers of ARS, including certain closed-end funds, have started to redeem
shares, generally at par value. In many cases, the issuers are calling the entire issue for redemption. In other
cases, the issuers are offering to redeem only some of the outstanding shares.
In the case of such partial redemptions, not every share will be redeemed. The process begins when an issuer
notifies the Depository Trust Company (DTC) that it will call for redemption part of the outstanding shares. DTC
is a company that serves as the repository for several million securities issues. DTC also handles book-entry
changes for securities registered in "street name" at brokerage firms. For partial redemptions, DTC allocates
redemptions among broker-dealers for which it is holding shares using an impartial system. The broker-dealers
receiving allocations then identify how those redemptions are to be allocated among their customers.
Investors need to be aware that in a partial redemption, it is possible that a broker-dealer holding ARS shares
may not be allocated redemptions in the DTC allocation process. If you are a customer of a brokerage firm that
does not get an allocation, you will not be able to participate in the partial redemption.

You should also be aware that, in the case of a partial redemption, a brokerage firm that receives an allocation
might not be able to redeem all the shares of all its customers. FINRA Rules require broker-dealers to adopt
procedures to allocate redemptions in the case of partial redemptions that reasonably allocate the shares they
receive among customers on a fair and impartial basis.
Where to Turn for Help
Ask your broker whether any ARS you hold are eligible for redemption. If so, and if the redemption is partial,
your brokerage firm should be able to tell you what procedures it is following to allocate shares among its
customers. If you have a problem related to ARS that your firm did not resolve to your satisfaction, you can file
a complaint online at FINRA's Investor Complaint Center.
To obtain a copy of the offering documents, contact the broker through whom you purchased your ARS
investment. Or, for a municipal bond offering, you may request a copy of the official statement from the
Municipal Securities Rulemaking Board's Municipal Securities Information Library at (703) 797-6704and, for
a closed-end fund, you can download the fund's prospectus from the issuer's Web site.
Additional Resources
FINRA News Release, FINRA Announces Agreements in Principle with Three Additional Firms to

Settle Auction Rate Securities Violations

FINRA News Release, FINRA Announces Agreements in Principle with Five Firms to Settle

Auction Rate Securities Violations

FINRA News Release, FINRA Creates Process for Arbitrations Involving Auction Rate Securities
To learn more about the risks of margin trading, read: Purchasing On Margin and Understanding

Margin Accounts, Why Brokers Do What They Do, and Investing with Borrowed Funds: No
"Margin" for Error.
More guidance on margin.
To learn more about a broker-dealer's obligations during partial redemptions, read: Regulatory

Notice 08-21, Partial Redemptions of Auction Rate Securities.

To receive the latest Investor Alerts and other important investor information sign up for Investor News.

For Release:
Contacts:

Thursday, October 23, 2008

Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464

FINRA Announces Agreements in Principle with Three Additional Firms to Settle

Auction Rate Securities Violations
Agreements Include Offers to Repurchase Over $60 Million of ARS Holdings at Par
Washington, D.C. The Financial Industry Regulatory Authority (FINRA) announced today that it has
reached agreements in principle with City National Securities (CNS), of Beverly Hills, CA, BNY Mellon Capital
Markets, LLC of New York and Harris Investor Services, Inc. of Chicago, to settle charges relating to the sale of
Auction Rate Securities (ARS). Each of the principle agreements is subject to being formalized in an approved
settlement document called a Letter of Acceptance, Waiver and Consent (AWC).
Last month, FINRA announced similar agreements in principle with five firms. Investigations continue at a
number of additional firms.
In the actions announced today, CNS, BNY Mellon and Harris have agreed to offer to repurchase at par ARS
that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008. A
total of more than $60 million of ARS are eligible for repurchase. The firms have also agreed to make whole
individual investors who sold ARS below par after Feb. 28, 2008. CNS will pay a fine of $315,000, while BNY
Mellon will pay a fine of $250,000 and Harris is being fined $150,000.
The firms also agreed to the appointment of an independent, non-industry arbitrator to resolve investor claims
for any consequential damages - that is, damages they may have suffered from their inability to access funds
invested in ARS.
"In all of our Auction Rate Securities investigations and settlements, FINRA's primary goal continues to be the
restoration of investors' access to the millions of dollars they invested in ARS," said Susan L. Merrill, FINRA
Executive Vice President and Chief of Enforcement.
In addition to individual investors, those eligible for ARS repurchase and/or payments for ARS sold below par
include non-profit charitable organizations and religious corporations or entities. Trusts, corporate trusts,
corporations, pension plans, educational institutions, incorporated non-profit organizations, limited liability
companies, limited partnerships, non-public companies, partnerships, personal holding companies and
unincorporated associations that made individual ARS purchases and whose account value did not exceed $10
million will also be eligible.
Each firm has agreed to provide notice to its eligible customers promptly. Repurchases must begin no later
than 30 days after the settlement is approved and must be completed no later than 60 days after settlement
approval. Beginning six months after settlement approval, each firm has also agreed to make its best efforts to
provide liquidity to all other investors who purchased during the same time period but who were not eligible for
the initial repurchase. Those best efforts may include offers to repurchase ARS and/or offers of low- or nointerest loans.
FINRA's investigation has found evidence that each firm sold ARS using advertising, marketing materials or
other internal communications with its sales force that were not fair and balanced and therefore did not provide
a sound basis for investors to evaluate the benefits and risks of purchasing ARS. FINRA's investigation also
found evidence that each firm failed to establish and maintain a supervisory system reasonably designed to
achieve compliance with the securities laws and FINRA rules with respect to the marketing and sale of ARS.

In the forthcoming formal settlement documents, the firms will neither admit nor deny the charges, but will
consent to the entry of FINRA's findings.
Earlier this year, FINRA released guidance for investors caught in the auction failures in the Investor Alert
Auction Rate Securities: What Happens When Auctions Fail.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or
brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007,
members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can
access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA is the largest non-governmental regulator for all securities firms doing business in the United States.
FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and
complementary compliance and technology-based services. FINRA touches virtually every aspect of the
securities business - from registering and educating industry participants to examining securities firms; writing
rules; enforcing those rules and the federal securities laws; informing and educating the investing public;
providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for
investors and registered firms.
For more information, please visit our Web site at www.finra.org.

For Release:
Contacts:

Thursday, August 7, 2008

Nancy Condon (202) 728-8379

FINRA Creates Process for Arbitrations Involving Auction Rate Securities

Washington, DC The Financial Industry Regulatory Authority (FINRA) announced today that it has
established a special process for resolving auction rate securities-based claims in its arbitration forum.
Qualifying investors will have the option of having their claims heard by a three-person panel of arbitrators,
none of whom would be affiliated with a firm that recently sold auction rate securities. The new process comes
as a result of the one developed by FINRA for the Securities and Exchange Commission's settlement with
Citigroup.
The arbitration panels will continue to consist of two public arbitrators and one non-public arbitrator.
To date, more than 170 cases involving auction rate securities have been filed in FINRA's Dispute Resolution
forum. Individuals who since Jan. 1, 2005, have either worked for a firm that sold auction rate securities or
themselves sold or supervised someone who sold them will not appear on non-public arbitrator lists given to
parties in these and future auction rate securities arbitration cases.

"In light of the settlement with Citigroup, FINRA believes it is a matter of fairness that all investors with auction
rate securities claims, regardless of the firm involved in the dispute, be handled in this manner," said Linda
Fienberg, President of FINRA Dispute Resolution. "FINRA will work expeditiously with parties to put this
process in place as soon as possible so these cases won't be unduly delayed."
FINRA Dispute Resolution is the largest securities dispute resolution forum in the world. It facilitates the
efficient resolution of monetary, business, and employment disputes between investors, securities firms, and
employees of securities firms by offering both arbitration and mediation services through a network of hearing
locations across the United States. It currently maintains a roster of

What to Expect When You Open a Brokerage Account

If you're reading this, you may be planning to open a brokerage account. You may wish to invest for your
retirement or a child's education, or simply to try to grow some cash you have set aside. This publication
explains what to expect if you do decide to open a brokerage account, including what information you will be
asked to provide, what decisions you will be asked to make, what questions you should ask your broker and
what your rights are as a customer of a brokerage firm.

Information You'll Be Asked to Provide

When you decide to open an account, there will be paperwork to complete. This will include a new account
application, which brokerage firms may also call a new account form, account opening form or something
similar. This application form will require you to provide some information about yourself, as well as ask you to
make certain decisions about your account. As explained in more detail below, brokers use this information for
several purposes, including learning about you and your financial needs and meeting certain regulatory
obligations. While it may take a little time to fill out the application, it is important to answer the questions on the
application accurately. So, be sure to read the application and the accompanying agreements and other
documents the brokerage firm gives you carefully and ask questions about anything you don't understand.
In a new account application, along with other information, you'll likely be asked to provide your:

Social Security or other tax identification number: The rules of the Securities and Exchange
Commission (SEC) and Financial Industry Regulatory Authority (FINRA)which regulate the
securities industry-require brokerage firms to ask for this information for several reasons. Like
banks, credit unions and other financial institutions, brokerage firms must report to the Internal
Revenue Service the income you earn on your investments. In addition, under the USA PATRIOT
Act of 2001, financial institutions may use your Social Security number to verify your identity when
opening brokerage accounts in order to help prevent money laundering and terrorist financing.

Driver's license or passport information, or information from other government-issued

identification: This, too, can help your broker comply with its obligations under the USA PATRIOT
Act.

Employment status, financial informationsuch as your annual income and net worth
and investment objectives: Collecting this information helps your broker to fulfill regulatory
obligations. For example, if your broker is recommending investments to you, SEC and FINRA
rules require that your broker collect this information. In addition, the information can help your
broker determine suitable investment recommendations for you.
Note that the terms used to describe investment objectives often vary across brokerage firms and
new account applications. You might hear terms such as "income," "growth," "conservative,"
"moderate," "aggressive" and "speculative." If you don't understand the distinctions among the
terms, ask your broker to explain or give examples. Make sure that you describe your financial
goals, your willingness to tolerate investment risk and when you expect to need the funds in your
account as accurately as possible.

Be accurate when you are providing the information requested on these forms. Your broker will use the
information to understand your financial needs and to meet certain regulatory obligations. In addition, you are
certifying that the information you've provided is accurate when you sign the new account application.

Decisions You'll Be Asked to Make

The new account form will also ask you to make some important decisions about your account, including how
you will pay for your transactions, how any uninvested cash will be managed and who will have control over
your account.

Do you want a cash account or margin loan account? Most brokerage firms offer at least two
types of accountsa cash account and a margin loan account (customarily known as a "margin
account"). In a cash account, you must pay for your securities in full at the time of purchase. In a
margin loan account, although you must eventually pay for your securities in full, your broker can
lend you funds at the time of purchase, with the securities in your portfolio serving as collateral for
the loan. This is called buying securities "on margin." The shortfall between the purchase price
and the amount of money you put in is a loan from the brokerage firm, and you will incur interest
costs, just as with any other loan.
There are risks that arise from purchasing securities on margin that do not come with most other
types of loans. For example if the value of your securities declines significantly, you may be
subject to a "margin call." This means that the brokerage firm can either (1) require you to deposit
cash or securities to your account immediately, or (2) sell any of the securities in your account to
cover any shortfallwithout informing you in advance of the sale. The brokerage firm decides
which of your securities to sell. Even if the firm gives you notice that you have a certain number of
days to cover the shortfall, the firm still may sell your securities before that timeframe expires.
Also, the firm may change, at any time, the threshold at which customers can be subject to a
margin call.
Be sure to read carefully your new account application and any other documents that your broker
gives you about margin loan accounts. Be sure that you understand how these accounts work
before you sign up for one. With some firms, you sign up for a margin loan account by default
unless you indicate otherwise on the application. If you have opened a margin account, but you
pay for your securities in full at the time of purchase, you incur no more risks than you would in a

cash account. For more information about margin loan accounts, read FINRA's Investor Alert,
Investing with Borrowed Funds: No "Margin" for Error.

Note: While margin loan agreements are typically used to allow investors to buy securities on
margin, some firms allow their customers to take out loans for other purposes. In connection with
these loans, a firm might ask the customer to sign a margin agreement. Before you borrow money
from your brokerage firm-for any reason-be sure you fully understand the terms, costs and
consequences.

How do you want to manage your uninvested cash? Sometimes there is cash in your account
that hasn't been invested. For example, you may have just deposited money into your account
without giving instructions on how to invest it, or you may have received cash dividends or
interest. Your brokerage firm typically will automatically placeor "sweep"that cash into a cash
management program (customarily known as a "cash sweep" program).
On your new account application, your brokerage firm may ask you to select a cash management
program. Cash management programs offer different benefits and risks, including different interest
rates and insurance coverage. Be sure you understand the different features of the cash
management programs that your firm offers so that you can make an informed decision if you are
asked to choose one.

Who will make the final decisions for your account? You will have final say on investment
decisions in your account unless you give "discretionary authority" in writing to another person,
such as your financial professional. With discretionary authority, this person may invest your
money without consulting you about the price, amount or type of security or the timing of the
trades that are placed for your account.
Some firms allow you to indicate who has discretionary authority over the account directly on the
new account application, while others require separate documentation. There may be other types
of authority that you may provide over your account, including a power of attorney and authorized
trading privileges. Make sure you think through the risks involved in allowing someone else to
make decisions about your money.

Other Account Opening Documents

The new account application may come with other documents-such as a "Customer Agreement," "Terms and
Conditions" or the like. These documents, along with applicable state and federal laws plus SEC and FINRA
rules, govern your brokerage relationship. Make sure to ask for copies if you do not receive them and download
or print out copies of these for your records if you conduct business with your brokerage firm online.
Be sure to take time to review carefully all the information in these documents, whether you are
opening your account in person at your broker's office or filling out your forms at home or online. And
do not sign them unless you thoroughly understand and agree with the terms and conditions they
impose on you.

Check Out Your Broker

If you haven't already done so, make sure you check out the background of your broker and brokerage firm
before you open an account with them. Although a history free from registration or licensing problems,
disciplinary actions or bankruptcies is no guarantee of the same in the future, checking out your broker and firm
in advance can help you avoid problems. Look up your broker and firm on FINRA Brokercheck by going to
www.finra.org/Brokercheck or by calling toll-free (800) 289-9999.
Also make sure that the phone numbers and addresses that your broker and brokerage firm give you as their
contact information are consistent with those listed in Brokercheck. Identity thieves have been known to steal
the identities of legitimate brokers and brokerage firms so that they can get at your personal information!

Questions to Ask
Asking questions will help you to invest wisely and avoid problems. No matter what your level of investing
experience, don't be shy or intimidatedit's your money. Here's a list to get you started.
1.
2.

3.
4.

Is this a margin account or a cash account? Can you explain the differences between the two?
What choices do I have regarding cash sweep programs? What are the different features, including
interest rates and federal insurance coverage? If the firm offers both bank deposits and money market
funds, what are the advantages and disadvantages of selecting one over the other?
Who will control decision-making in my account?
How often will I get account statements? Who will provide the statements and will they be online or in
paper?

Tip: The brokerage firm that you open an account with may not be the one that sends your account
statements. You may open an account with an introducing firm, which makes recommendations, takes
and executes your orders and has an arrangement with a clearing and carrying firm, which is the one
to finalize ("settle" or "clear") your trades and hold your funds or securities. There are also firms that take
and execute orders and settle trades. If you work with an introducing firm, you may receive statements
from the clearing firm. Find out what type of firm you open an account with and who will send you the
account statements. You will receive an account statement at least once every calendar quarter.
5.

Will my securities be registered in my name, or in the name of the firm? Can you explain the
differences between the two?

Tip: Whether the securities are registered in your name or in the name of the brokerage firm can affect
how soon you receive your dividends and interest, the ease with which you can sell your securities and
the types of communications you receive directly from the issuer of the securities, among other things.
For more information, see "Holding Your SecuritiesGet the Facts" on the SEC's Web site at
http://www.sec.gov/investor/pubs/holdsec.htm.
6.

What are all the fees relating to this account? How much are commissions? Are there any other
transaction or advisory fees? Fees for not maintaining a minimum balance? Account maintenance,
account transfer, account inactivity, wire transfer fees or any other fees?

7.
8.

What services am I getting with this account?

Who do I contact if I have a question or concern regarding my account? What are the different ways I
can contact my account representative or his or her manager? Phone? Email? Local branch office?

As You Monitor Your Account

After you open your account, you should monitor its activity regularly. Make sure that you review all of your
account statements and trade confirmations for any errors or any transactions that you did not authorize. If you
see any evidence of unauthorized trading or errors, notify your broker, broker's supervisor or brokerage firm's
compliance department immediately to further protect your rights. Make sure to take notes of any conversations
you have with your firm concerning such disputes, to send in your complaints in writing as well and to keep
copies of these notes and all communications related to such disputes for your records.
Ask yourself whether your investments are meeting your expectations and goals and whether your goals have
changed. Do your investments still appear to be right for you, and what criteria will you use to decide when to
sell?