Investment Tips: Investment Type Suited for your Needs
There are tons of different ways to invest your money. The real question here is what type of investment is right for you? Looking for the most suitable investment type that will reap a good harvest is a daunting task.
One biggest element in growing your wealth is the value of return you will get on your investment. There are occasions where you may need to put your money somewhere for a while, although you won’t acquire very good revenue (short-term investments). Or you may also be willing to take a risk and consider a long-term investment that has a higher probability of maximizing your returns. Whichever investment type you choose, here is a guide to the most common short-term and long-term vehicles you might want to consider.
SHORT-TERM SAVINGS VEHICLES
Bank savings account: This is the most availed saving medium used by many people. Bank savings account has low monetary return but this is much more preferable than using your old piggy banks.
Money market funds: This have higher returns compared to bank savings account, however, certificate of deposit are much more preferable than money market funds when it comes to earning more. Money market funds are designed with a maintaining value of $1 per share at all times.
Certificate of deposit (CD): The interest rate on CD’s depends on its fixed maturity date. The maturity date is fixed which means that you cannot get your money (there’s a penalty if you want to) not until the maturity expires. The accumulated interest plus the original amount will be returned once the maturity ends. It’s a specialized deposit issued by commercial banks and are usually insured up to $100,000.
LONG-TERM INVESTING VEHICLES
Bonds: This type of investment option is where an investor loans money to a government or corporation to finance their various projects and activities. In return, the investor will be the owner of the bond and the issuer who borrows the money for a defined period of time will pay a fixed rate of interest during the life of the bond.
Stocks: Stocks is a type of investment where a company or business allows an individual to own a portion of the company. The worth value in the market of the share is proportional to the company’s growth.
Mutual funds: It is an investment vehicle where investors pool their money to invest in securities such as stocks, bonds, money markets that money managers think as worthwhile.
RETIREMENT PLANS
Planning for retirement should now occupy your mind. Nowadays, various special plans are created for retirement savings and many of these allow the early transfer of money from your paycheck before the deduction of taxes. If you intend to buy a home or pay for education, there are some retirement plans which allow early withdrawal of your money without penalty fees. In some cases, making retirement savings as collateral to borrow money from the account or apply for a low-interest secured loan is permitted too.
Individual retirement account (IRA): IRA’s are specialized accounts which allow the account holder to invest the money freely in any manner. In this type of retirement plan, you will not be taxed unless you withdraw your fund. If you meet certain requirements, IRA payments may be considered tax deductible.
Roth IRA: This type of retirement plan does not demand tax payments on your contributions and offers exemption from federal taxes when you decided to withdraw from the account.
401(k): Employers offer this type of retirement savings and most commonly a suitable choice for many people. 401(k) has tax advantages with the potential benefit of corporate matching.
403(b): This retirement plan is the nonprofit version of a 401(k) plan. There is also a so-called 457 plan offered by the local and state government.
Keogh: A tax-deferred special type of IRA for self-employed individuals or small businesses for retirement purposes.
Simplified Employee Pension (SEP) plan: A Keogh-based plan established by employers and self-employed individuals to provide retirement plans that are easier to administer compared to normal pension plans.
A closer look at stocks
Stocks have much better returns compared to bonds and other investment vehicles. Investing in stocks means being one of the many owners of a company, thus, you have a claim on every asset and earning the company generates. The higher your share, the greater your ownership stake in the company. The existence of stock market starts in the 16th century by Dutch corporations as a way for businessmen to finance their company using investor’s money. In return, the investor can claim ownership of assets and profits of a company as a part-owner.
What is common stock?
Common stock is the most prevailing type of stock most people choose since anyone can participate in buying this type of investment without imposing restrictions. When you purchase a common stock, you become a part-owner of the company with the power to vote or elect a board of directors. The board of directors is a group of individuals capable of influencing corporate policies and decisions for the growth of the company. If they want to fire the company manager, they can do so because they possess the power to manage the entire company. However, if the company doesn’t generate a positive income, the value of shares will decrease too. In the event of company bankruptcy, the stock will then become worthless.
Classes of Stock
Usually, the difference between the classes of stock is a number of voting rights assigned. As an example, Class B share can have a single vote for each share while Class A possesses 10 votes per share. This is often considered an unfair deal for many investors and they often avoid companies with this kind of strategy. And the reason for creating this is for the owner to retain the control over the business. They usually give the class of shares with the fewest number of votes to the public while reserving the class with the largest number of votes attached to it for the owners and major investors.
