Investing in stocks allows you to own part of a business. One share of stock represents a share of ownership in a company. Companies make shares available when they want to raise money to fund further growth and development. These shares are often publicly traded on a stock exchange and can vary widely in price from day to day.
Unlike more secure investments, investing in stocks gives you no guarantee of a return. Since your profit is linked to the profitability of the company and the whims of the stock market, you could lose money if the value of the stock slips below what you originally paid.
To buy stocks, you most likely will work with a broker. Many different services—such as research and advice—are offered by pricey full-serve brokerages, or you can opt for more affordable discount brokerages. And some discount brokers will offer you the option to trade online.
- The upside? While the average annual percentage return on stock investments has been lower than in previous years, it is still higher than other types of investments.
- The downside? There's quite a bit of risk involved with buying stocks, because just as easily as your stock's value can increase it can decrease, meaning you lose money.
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A mutual fund allows you to pool your money with other investors to buy stock in a number of companies. The mutual fund manager, who oversees investments in the fund, selects the companies based on the investment philosophy of the fund.
- The upside? Because your money is distributed among various stocks, the risk is lower—even if one stock bombs, you're still OK if the other stocks increase in value.
- The downside? Many mutual funds require a minimum investment. You may also pay a fee, called a "load," to have your fund managed by someone else. In addition, there may be a specified "holding time" during which you won't be able to sell the stocks in your fund. As a result, mutual funds are a great deal less "liquid" than other investment options—meaning you won't be able to convert your investments back to cash easily if you need the money.
Bonds are like IOUs that large organizations make out to investors. With a bond, your investment is really a long-term loan. Bonds are referred to as "fixed-income" securities because the amount of income the bond earns is set when you buy it. When you purchase a bond, you receive a document recording the amount lent, the interest rate and how often interest is paid.
There are four kinds of bonds: federal government, corporate, state and local government and foreign government (these are rare for individual investors).
- The upside? The risk can be minimal, depending upon the source of the bond. For example, U.S. savings bonds are insured and guarantee a certain rate of return.
- The downside? Bonds don't offer a very high return on your investment, and they typically require an investment of $1,000 or more. And in some cases, the bond is not insured, which means you may have no guarantee that you will make money on your investment. If you purchase a bond from a company that later goes bankrupt, you'll lose your investment—so you need to investigate carefully before investing in corporate bonds.
Learn about your options before investing, and decide how much risk you're willing to take. Then make a choice about your financial future and put your savings to work!