Opening an investment account requires careful consideration, as even well-advised investments have risks. Always be sure to thoroughly research a potential investment’s history to determine whether your finances can handle its previous pattern of ups and downs. Discuss your potential investments and future plans with a financial advisor as it is he who is going to advise you to save, invest and multiply your hard-earned money.
Shorter Term Investment Accounts
Most financial industry experts recommend you decide how much to invest based on how soon you’ll need to access your money. Most financial advisors recommend letting your investment grow for five or more years. If you need to make a shorter-term investment, consider money market accounts, money market funds, certificates of deposit, or treasury securities. These investment vehicles offer “short-term storage” alternatives that help you protect your money and earn interest at the same time.
Money Market Account
These savings accounts pay higher interest rates and require minimum balances of up to $2,500. The account holder has restrictions on the number of withdrawal of funds that he/she can make in a particular period of time. While most money market accounts only allow you to make three to six withdrawals, most will also allow you to write checks. Many banks and financial institutions provide money market accounts.
An account holder can earn interest on it too just like any other savings account and the interest earned in it is also taxable. Banks offering money market accounts does not take much risk during investment of deposits, investing in certificates of deposit, government securities, and commercial paper.
Money Market Fund
Money market funds are often managed by brokerages and used to store money that isn’t currently being invested. They collect interest at slightly higher rates than money market accounts.
It is a lucrative and safe investment for shareholders who earn interest while sustaining the NAV (Net Asset Value). It mainly includes short-term securities. Banks, brokerage firms and mutual funds offer money market fund for the shareholders and investors. In a nutshell, it is a low-risk investment with high returns. Investors can easily avail cash-equivalent assets from this safe haven of investment.
Certificate of Deposit (CD)
CDs pay higher interest rates than traditional savings or money market accounts. They require that you do not withdraw any money for a period as short as 18 months up to 10 years. CD is characterized by fixed interest rate and maturity date and is considered as among the safest investment a person can make when it comes to money.
When you buy a treasury security, or bill, you’re lending to the government. When the bill reaches its maturity rate, you receive your interest in return. The bills generally have a maturity period as that of 13 weeks, 26 weeks and 52 weeks. It also includes notes and bonds. The treasury notes have a maturity date that is around 1-10 with a fixed interest rate. However, the interest rate increases with the inflation rate in the market.
Longer Term Investment Accounts
Once you feel you feel you understand the basics of how investing works, consider brokerage accounts like stocks, bonds, and mutual funds. These investments take longer to grow and can be trickier to navigate, but often offer higher returns.
Stocks and Bonds
Stocks are riskier because companies are subject to the whims of the market as well as public interest. Investing in a stock is a gamble as its value depends on market fluctuations: the company may do poorly, or very well. If your investment pays off, then you’ll reap the benefits of your foresight. If they do poorly, you could lose money. Bonds are less risky because you’re guaranteed an 8% return twice annually. The company’s stock fluctuations will not affect you, for better or for worse.
Another major difference between stocks and bonds is that stocks are equities whereas bonds are debt. Buying stocks can make any person richer so much so he can own a corporation which facilitates him to share profits when the share value increases in the market.
A bond is a loan and the one who buys it is nothing but a borrower. The organization that sells a bond is known as the issuer. Mainly large organizations purchase bonds when they are in dire need of money or suffer from a major financial crisis. They may also need it to expand their market or venture into a new business. Government too can buy bonds to sponsor infrastructural projects. In such cases an average bank cannot provide the wealth to a large company or government as the stakes tend to be higher and they are in need of large amount of money.
Mutual funds rise and fall with the entire economy instead of just one company. They are subject to market risks but are professionally managed. Mutual funds are mainly owned by shareholders who trade in heterogeneous holdings. The four main categories of mutual investment funds are money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds. You can either invest in a mutual fund with or without an active manager. Mutual fund managers select the stocks and bonds that will comprise the fund. Actively managed mutual funds can be more expensive since the investors need to pay the manager to select stocks. Mutual funds that aren’t actively managed function to “equal the returns of a major stock index.” They use a computer program to track the holdings of an index like the Standard & Poor 500, the Russel 3000, or the Wilshire 500, and therefore their fees are much lower. When compared with stocks and bonds, index funds have historically had higher returns because they charge lower fees. Most mutual funds will charge you a fee for buying or selling shares. Protect yourself from paying additional expenses, like high capital gains taxes, by steering clear of mutual funds that trade quickly in and out of stocks. Base your investment decisions upon prudent financial advice.
Try to look as far ahead into your financial future as possible to ensure that you make appropriate investments at the right time in your life.