Investments available to grow your money
When it comes to growing your money, it is essential to know the types of investments available. Here we present three main types of investments:
Companies issue shares of their stock to raise funds for starting or growing their operations. When you invest in stocks, you are acquiring an ownership stake in a corporation. You become a shareholder.
There are two types of actions:
- Common Stock: Shareholders have a percentage of ownership, have the right to vote on issues affecting the company, and may receive dividends.
- Preferred Stocks: Investment returns and risks for both types of stocks vary depending on factors such as the economy, political situation, company performance, and other stock market factors.
When you buy a bond, you are lending money to a business or government entity, such as a city, state, or nation.
Bonds are issued for a set period of time during which interest payments are made to the bond holder. The amount of these payments depends on the interest rate set by the bond issuer when the bond is issued, known as the coupon rate, which can be fixed or variable. At the end of the established period (maturity date), the issuer of the bond is obliged to return the face value or face value of the bond (the amount of the original loan).
Bonds are considered a more stable investment compared to stocks because they generally provide a steady stream of income. However, due to its stability, its long-term performance will likely be lower compared to stocks. However, bonds can sometimes outperform the rate of return on particular stocks.
It is important to note that bonds are subject to various investment risks, including credit risk, payment risk, and interest rate risk.
Cash equivalent investments protect your original investment and allow you to access your money. Some examples include:
- Savings accounts
- Money market accounts
- Certificates of deposit (CD)
These different types of investments generally offer a more stable return. However, cash equivalent investments are not designed for long-term investment goals, such as retirement. After paying taxes, the rate of return is often so low that it does not keep pace with inflation.
5 Investment Questions to Analyze Your Portfolio
Investments are tools that help you achieve your financial goals. Knowing more about how to use them can improve your financial future. Answers to a few simple investing questions can get you a step closer to understanding what you need and how your portfolio can help you. Think about your investment portfolio and ask a financial professional these 5 questions:
- What is this money for? Most people find it easier to allocate their savings to specific goals. Are you saving for retirement? Is this an emergency fund? Do you want to take a dream vacation? Worried about how to pay for long-term care in retirement?Determining your overall goals will help you make decisions about issues such as the amount of risk you are willing to take and the types of investment products that best fit your philosophy. For example, if your goal is an emergency fund, you may choose a low-risk investment, which in turn may mean a lower return.
- What is the expected rate of return? Of course, you want to make as much money as possible, but it’s important to remember that how you choose to invest that money may have limitations that affect how much or how quickly you’ll earn returns. There are two main factors that affect returns: risk and fees. It is important to understand how much money an investment is likely to make; the form of that return, such as capital gains, interest or dividends; and the cost of the investment. With that understanding, you can make the investment decision that aligns with your financial goals.For example, some people choose retirement investments that have higher return potential because they have more time to recoup losses, which may not be the case with money earmarked for a down payment on a first home.
- How much risk can I tolerate? All investments carry some risk. This means that no matter what type of investment you make, there is a level of uncertainty about how the investment will perform or how much money you could earn or lose on it. How much risk you can bear depends not only on your personal temperament, but also on how long it will be before you need the money and what your overall financial situation is.
- What is my tax situation? Certain types of investments offer tax advantages, at least for some investors. For example, making contributions to retirement plans, college savings plans, and certain types of life insurance policies can reduce your income taxes for the year you invest that money. Whether or not you can benefit depends on the state you live in and your overall financial situation.The sale of some investments also affects your taxes for the year. If you made money on the investments you made, you will pay capital gains taxes. If you sell an investment at a loss, that is, for less than you paid for it, you can claim that loss to reduce other capital gains amounts on your tax return for the year.
- What are my special needs and circumstances? Individuals and families have different financial needs. Maybe you own stock from your employer, hope to inherit land from your grandfather, or have religious objections to certain types of investments. Other common but special circumstances include the need to care for a child with a disability, pursue philanthropic interests, or support a blended family. All of this will affect your financial objectives, your risk and return requirements, and possibly your tax situation.
This is not a one-time exercise. Your financial situation and the financial markets will change over time, so revisiting these questions will help you stay on track. As the answers to these investing questions change, you can adjust your financial planning so your money continues to work for you. Make sure you have a trained financial professional to help you answer these questions and make sound decisions that address your needs.