Investing 101

Investing Benefits
If you keep all of your extra money in cash, you're missing out on a big opportunity. Investing your money is a great way to get your money to work for you. A simple example of this is a savings account. Let's say that you put $100 into a savings account with a 3% interest rate. At the end of a one year period, you'll have $103 in your savings account while if you just held your money in cash, you'll still only have $100.

Basic Investment Vehicles
There are 3 basic types of investments, short term (savings accounts, money market, CDs), bonds and stocks. Your mix of investment swill depend on the amount you have to invest, your investment timeline and risk tolerance.

Short-Term (Savings Accounts/Money Market/CDs)
Short term investments such as savings accounts, money market accounts, and CDs (certificate of deposits) are all relatively safe investment and are very unlikely to default. Typically most accounts at a bank are federally insured, protecting you from any losses. Because of this, the return offered on these investments are typically lower then what you'd get if you were to invest in bonds or stocks.

It is recommended that you have at least enough savings to cover 6 months of living expenses in any blend of these short-term investment vehichles to cover any emergency expenses that may come up unexpectedly, such as losing your job, a leaky roof or an unexpected car repair.

Bonds
Buying a bond can be viewed as loaning out money to the corporation or government entity in return for a predetermined interest rate. Bonds are typically riskier than the short-term investments mentioned above (with the exception of federally issued bonds, which carry virtually zero-risk). Because of this, the typical return on bonds will be higher. Your rate of return will depend on the duration of your bond and the rating of the bond (usually a bond with longer duration and a lower quality rating will have a higher return). Bonds can be bought through an online brokerage account.

Stocks
When you buy stock, you are buying an ownership share of the company. As the earnings and earnings expectation of a company rises, the stock price will typically rise as well. Stocks prices are more volatile than the other forms of investment mentioned but have historically had the highest rate of return over the long run, however the risk and price fluctuations are also higher.

For an individual investor, it is recommended that he/she purchase a low cost index fund, which tracks the movement of the stock market as a whole; doing this will eliminate company specific risk if you were to only buy a few stocks. Stocks can also be bought through an online brokerage account.

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