Investing

INVESTING BASICS

When you invest, you're trying to increase your income, build the value of your assets, or both.

Investment Basics
Enormous Opportunities
Choosing the Best Investment
Other Investments
Tax-Deferred Investing
Securities

Investing

It's never too soon to start thinking about investing. Investing means putting your money to work earning more money. Done wisely, it can help you meet your financial goals. They might be buying a home, paying for a college education, enjoying a comfortable retirement or whatever is important to you.

You don't have to be wealthy to be an investor. Investing even a small amount can produce considerable rewards over the long term, especially if you do it regularly.
But investing means you have to make decisions about how much you want to invest and where to invest it. To choose wisely, you need to know what choices you have and what risks you take when you invest in different ways.

Stocks are ownership shares that investors buy in a corporation.

Cash and cash equivalent investments include money in bank accounts, certificates of deposit (CDs), and US Treasury bills.

Bonds are loans that investors make to corporations, governments, and agencies.

INVESTMENT BASICS
There are three basic investment categories: stocks, bonds, and cash. You can invest directly in any or all of them, or indirectly by buying mutual funds that pool your money with money from other people and then invest it. Stock mutual funds, for example, buy stocks, while money market funds make cash investments.

ENORMOUS OPPORTUNITIES
If you want to invest, you have a wealth of opportunities. In the US alone there are thousands of stocks and mutual funds, and millions of corporate and government bonds to choose from. You can invest in markets around the world, in developed or emerging economies. You can work with one of the more than 5,000 brokerage firms, 9,000 banks, or tens of thousands of financial advisers in the US. You can even invest directly with the issuer, whether corporation, investment company, or government. And you can invest online using your computer.

CHOOSING THE BEST INVESTMENT
Selecting the best investments for your portfolio depends on your financial goals and general market conditions. For example, a good investment for a long-term retirement plan may not be a good investment for college savings. In each case, the right investment is a balance of three things: liquidity, safety, and return.

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LIQUIDITY
How accessible is your money?
If your investment money must be available to cover financial emergencies, you'll be concerned about liquidity, or how easily it can be converted to cash without loss of value. Money market funds and savings accounts are very liquid. So are investments with short maturity dates like CDs. But if you're investing for longer-term goals, liquidity is not as much of an issue. What you're after in that case is growth, or building your asset value. Certain stocks and stock mutual funds are considered growth investments.

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SAFETY
What's the risk involved?
Investing means taking a risk. To many people, the biggest risk is losing money, so they look for investments they consider safe. Usually that means putting money into bank accounts and US Treasurys. The opposite but equally important risk is that the safest investments will not provide enough growth or income to offset the impact of inflation, the gradual increase in the cost of living. There are additional risks as well, including how the economy is doing. But the biggest risk is not investing at all.
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RETURN
What can you expect to get back on your investment?
Relatively safe investments often promise a specific, though limited, return. Those that involve more risk offer the opportunity to make — or lose — a lot of money.

OTHER INVESTMENTS
You can find many other things to invest in, such as gold, real estate, or futures and options, if you're looking for more variety or can afford to take added risk. But most experts agree that the basic three — stocks, bonds, and cash — should be the core of any investment portfolio. High on the list of reasons for that advice are their easy-to-understand structures and the long-term history of consistent performance that characterize these standard investments.

In addition, if you need to liquidate your assets quickly, you can sell these investments easily although you may not necessarily sell at a profit. That's not the case with collectibles and real estate, which may take more time to sell.

TAX-DEFERRED INVESTING
If you want your investments to grow even more quickly, you don't have to take more risk. What you can do is put money into tax-deferred investments, including individual retirement accounts (IRAs) and employer sponsored retirement savings plans like 401(k)s, Keoghs, or SIMPLEs.

In most cases, there's a cap, or limit, on the amount you can invest tax deferred each year. But many experts advise you to take the fullest advantage you can of this opportunity for your long-term investments.

Securities, by definition, are written proofs of ownership, like stock or bond certificates. But as electronic records replace paper ones, the term survives as a way to describe stocks and bonds, even though it now refers to investments that are secured as computer files.

There is one drawback to tax-deferred investing. Generally you'll have to pay a 10% early withdrawal penalty — as well as whatever tax is due — if you take money from tax-deferred accounts before you are 59 1/2. That's because the tax-deferral incentive is intended to get you to save for retirement.

If your concerns are the same as the majority of Americans, though, you're probably worried about having enough money when you retire. In that case, tax-deferred investing can be a ready-made solution. And there are some situations when the withdrawal penalty is waived, including serious illness, span college tuition, or putting money down on a first-home purchase.

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