From simple savings accounts to complex derivatives, the financial markets offer several investment choices to fit your financial objectives and tolerance for risk and volatility. However, take the time to understand and research these investment options to avoid making costly mistakes. Information technology makes it possible to research investments and place trades quickly and cost-effectively.
Banks offer checking and savings accounts to park your surplus cash. These accounts are safe, convenient and provide modest interest income. Banks also offer money market accounts and certificates of deposit, which usually pay higher interest rates.
Stocks represent ownership interests in companies. Revenue and earnings growth usually lead to higher stock prices. Some companies also pay regular cash dividends to shareholders. The risks include price volatility and the possibility of losing your investment if a company goes bankrupt.
Bond investors receive regular interest payments and get the principal back on maturity. Corporate bonds are riskier than government bonds but pay higher interest rates. Bonds lose value when interest rates rise or when issuers default on their debt obligations.
Mutual funds are professionally managed pools of money raised from investors. They offer professional management and diversification at reasonable cost. You could also invest in exchange-traded funds, which track market indexes and trade on stock markets just like stocks.
You can buy annuities from banks or insurance companies by making one upfront payment or a series of payments. In return, the financial institution usually makes periodic payments to you for a certain number of years and a lump sum payment at the end.
Investors use derivatives, such as futures and options, to speculate or to protect investment portfolios from losses. Futures are contracts to buy or sell commodities and other financial products in the future at prices set today. Options give holders the right to buy or sell the underlying securities at specified prices within a certain period. The risk with derivatives is that you could lose more than your initial investment if you are not careful.
Investing in a house gives you a place to live and the chance to build equity. A real estate investment trust is another investment possibility. These trusts are holding companies for different types of real estate properties, such as apartment buildings and shopping malls. REITs trade on the stock markets and usually pay most of their profits as dividends to investors.
Commodities include metals, energy and agriculture products. You can buy the actual physical commodity and store it somewhere for resale later. However, the more practical option would be to invest in commodity derivatives or mutual funds.
You could buy and sell currencies based on your assessment of global economies. For example, you could sell U.S. dollars to buy euros or yens if you think the European and Japanese economies are going to outperform the U.S. economy. If you are right, you could sell the foreign currencies at a profit.
You can invest in a small business, such as a franchise or a consulting firm. You would be your own boss by investing your time and money in yourself. However, you will not have a steady paycheck and might run into occasional cash flow problems.
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