A Basic Guide To Investing, Understanding Risk And Reward.
Article By : Patrick Mansfield | U.S. Consumer Finance
It may seem like some people find financial security suddenly. It does happen. The fact is for the majority, financial independence is attained through challenging work, paying dues, and taking it one step at a time.
There are two ways for getting your money to work for you:
Your money earns money. Someone pays you to use your money. In time, you get that money returned with interest.
You buy stock/shares in a company that returns dividends on that investment. The company pays you a portion of its earnings on a regular basis. Your money is now making an income.
Investments happen everywhere:
You buy an item that’s expected to increase in value. You become an owner of a property that will grow the investment. When the time is right, you sell the item or property, imagining there will be a hefty profit for your trouble.
Compound interest is a key component of investing:
With compounded interest, your savings account earns interest on the money you’re saving, as well as on the interest that money earns. With time, even a small amount of savings has the potential to add up to big money, helping an investor achieve financial objectives.
All investments have a degree of risk:
When purchasing securities, it is important to understand that there is always a possibility you may lose some or even all your money. Securities include stocks, bonds, mutual funds and other financial instruments.
Unlike FDIC insured bank deposits and NCUA insured credit unions, any money you invest in securities is not federally protected. Investors lose principle investments every day, which is the amount originally invested. And this is true even if that investment was made through a bank.
The reward for taking the risk is the possibility of a return on principle. By having a goal with a long-term horizon, you increase the possibility of making money as you carefully invest in higher risk assets, such as stocks and bonds. On the other hand, investments solely in cash instruments can be appropriate for short-term financial goals. The major concern for many engaging in cash equivalents is inflation risk. This is the risk that inflation has on the economy and your investments, eroding returns.
U.S. Consumer Financet cannot recommend specific investments. We still want you to know there is a wide range of investment products to consider: stocks and stock mutual funds; bonds and bond mutual funds; life cycle funds; exchange-traded funds; certificates of deposit; money market funds; and annuities. Before putting money in any, research them. Each is unique and some suit specific personalities.
Don’t become a victim of fraud. Understanding how scam artists work will help you protect your hard-earned money. There are too many who can sadly claim to have fallen victim to the get-rich-quick scheme. If you know the basics, you know the market and can see fraud coming from a mile away.
Learning to invest safely and smart will help you reach financial goals. Secure your future, your retirement years and peace of mind.