buying an investment

Posted : February 19, 2018
Last Updated : February 19, 2018
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buying an investment

An investment is a long-term savings option that you purchase for future income or financial benefit. Many banks now sell investment products (e.g., mutual funds). While some investment products are sold at banks, they’re not the same as deposit accounts because the money you invest isn’t federally insured.

When you invest money, there is also a greater risk of losing it than if you put your money in a savings or other deposit account. In fact, there is a possibility that you might lose the entire amount you invest if the investment doesn’t perform well.

On the other hand, your investment may earn and grow more than a regular savings account because of the risk you take when you invest your money. In general, the higher the risk, the higher the potential rate of return on the investment. You make money on investments by selling them for more than you paid for them, or by earning dividends and interest. The money you earn is considered income and you may have to pay taxes on it.

In case of an emergency, sudden illness, or job loss, you always want to be able to support yourself. Therefore, most financial advisors recommend that, before you do any investing, you have a savings cushion that will allow you to pay bills and expenses for six months. While you might find this cushion hard to attain, even a small rainy day fund is important. Any money you’ve saved beyond this savings cushion can be used for investing.

Investment products include:
  • Savings bonds.
  • Corporate bonds.
  • Mutual funds.
  • Stocks.
  • U.S. Treasury securities.

Savings Bonds

I Bonds are purchased at face value, which is the amount printed on the bond. In other words, a $50 bond will cost $50. I Bond interest is composed of a fixed rate plus an inflation rate, which may change every six months. Interest is added to the bond monthly and is paid when the bond is cashed. I Bonds must be held for one year before they can be cashed. If an I Bond is cashed within the first five years, there is a three-month interest penalty.

EE Bonds are normally purchased at half their face value, so a $50 bond will cost $25. If you buy EE bonds electronically via www.TreasuryDirect.gov(Opens in a new window.), they’re sold at face value. All EE Bonds purchased after May 2005 earn a fixed rate of interest. EE Bonds must be held for at least one year before they can be cashed. If an EE Bond is cashed within the first five years, there is a three-month interest penalty.

Corporate Bonds

When you buy corporate bonds, you’re lending money to a corporation for a certain period of time, called a term. The corporation promises to repay the amount of money you’re lending it on this specified date in the future. In addition, it may promise to make regular interest payments to you. You may lose money if the corporation fails to honor its promise.

Mutual Funds

Mutual funds are offered by companies that combine money from many investors to purchase numerous separate investments. The investment products in a mutual fund are managed by a professional and typically include numerous stocks and bonds.

By combining your money with the money of other investors, you can diversify even a small investment. Diversification is the concept of “don’t put all of your eggs in one basket.” Diversification reduces the risk that you’ll lose your money because you spread the risk of loss across many savings and investment options.

Like stocks, mutual funds may pay dividends, and they may also gain or lose money over time.

Stocks

When you buy a stock, you own part of the company, called a share. A company that does well might periodically pay you dividends. Dividends are the portions of the company’s profits that it gives to you as a shareholder. The value of your investment changes according to the stock market. When you sell the stock, you may either earn or lose money.

U.S. Treasury Securities

U.S. Treasury securities are offered by the federal government, and include:
  • Treasury bills or T-bills are sold at a discount from their face value and range in terms from a few days to six months. When a T-bill matures, you’ll be paid the face value. T-bills pay interest every six months.
  • Treasury notes or T-notes pay interest every six months and are issued in terms of two, three, five, and 10 years.
  • Treasury Inflation-Protected Securities (TIPS) provide protection against inflation, and the interest rate is tied to the Consumer Price Index. TIPS pay interest twice a year.
  • Treasury bonds or T-bonds pay interest every six months and range in terms from 10 to 30 years.

The minimum purchase price for these products is $100. Buying U.S. Treasury securities and savings bonds is a safe investment because your money is backed by the U.S. government. Savings bonds may be purchased through a payroll deduction, through your financial institution, and at www.TreasuryDirect.gov(Opens in a new window.).

How to Choose the Best Investment

  • Learn as much as you can about the investment from the prospectus, financial magazines, and the company administering the investment.
  • Keep in mind that past performance isn’t a guarantee of future performance.
  • Consider how long you plan to keep your money in the investment. If you invest over time, you’re more able to ride out the ups and downs of the stock market.
  • Diversify. You should have a mix of investment products that reflect your needs for return, safety, and long-term savings.
  • Re-evaluate your investments from time to time. Your ideal composition of investment products will shift over time.
  • Determine how much risk you’re willing to tolerate. Remember, there is a trade-off between risk and return.

Before investing for retirement:

Ask your employer about any retirement accounts offered through your workplace.
Learn more about investment options from your bank’s customer service representative or a reputable financial advisor.
  • Don’t follow investment advice blindly. Do your own research.
  • Read the prospectus of an investment product or instrument carefully.
  • Get more information from reliable sources, such as irs.gov.
Don’t invest in anything you don’t fully understand.

Remember, investments aren’t federally insured. You could lose the interest and the principal of your investment.

Other Investments

There are two more investment options: owning a home or business.

Owning a home is an investment because the house generally increases or appreciates in value. Equity is the difference between how much the house is worth and how much you owe on the house.

Owning a business is also an investment. Although starting a business can be risky, if planned and managed correctly, it has the potential to increase your future financial security.

These options may not be for everyone, and the decision to invest in a home or business needs to be made very carefully. For more information, start by contacting your local Small Business Administration district office for more information on training and counseling programs to help you learn how to start, grow, and succeed in business. Visit sba.gov.



Source: PlanningYourDreams.org
 

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