What is the most you have every lost in a day or earned in a day through an investment? Explain.
Investors today have a wide range of choices: stocks, bonds, mutual funds, Treasury securities (including savings bonds), options, commodities, commodity futures, real estate investment trusts (REITs), variable annuities and many more. You must investigate before you invest—and remember that every investment involves some degree of risk. These securities are not insured by the federal government if they fail—even if you purchase them through a bank or credit union that offers federally-insured savings accounts. Make sure you have answers to all of these questions before you invest.
* How—and how quickly—can you get your money back? Stocks, bonds, and shares in mutual funds can usually be sold at any time, but there is no guarantee you will get back all that you paid for them. Other investments such as limited partnerships, often restrict your ability to cash out your holdings.
* What can you expect to earn on your money? While bonds generally promise a fixed return, earnings on most other securities go up and down with market changes. Also keep in mind that just because an investment has done well in the past there is no guarantee it will do well in the future.
* What type of earnings can you expect? Will you get income in the form of interest, dividends or rent? Some investments, such as stocks and real estate, have the potential for earnings and growth in value. What is the potential for earnings over time?
* How much risk is involved? With any investment, there is always the risk that you won’t get your money back or the earnings promised. There is usually a trade-off between risk and reward—the higher the potential return, the greater the risk. The federal government insures bank savings accounts (see FDIC) and backs up U.S. Treasury securities (including savings bonds). Other investment options are not protected.
* Are your investments diversified? Some investments perform better than others in certain situations. For example, when interest rates go up, bond prices tend to go down. One industry may struggle while another prospers. Putting your money in a variety of investment options can help to reduce your risk.
* Are there any tax advantages to a particular investment? U.S. Savings Bonds are exempt from state and local taxes. Municipal bonds are exempt from federal income tax and, sometimes, state income tax as well. For special goals, such as paying for college and retirement, tax-deferred investments are available that let you postpone or even eliminate payment of income taxes.
The following companies rate the financial condition of corporations and municipalities issuing bonds. Their ratings are available online and at many public libraries.
* Standard & Poor’s (
www.standardandpoors.com)
* Moody’s Investors Services (
www.moodys.com)
* Weiss Ratings (
www.weissratings.com)
For ratings of mutual funds, consult magazines such as Kiplinger’s Personal Finance, Money, Consumer Reports, Smart Money, and Worth.
For stocks, get a prospectus from the company that describes the investment and provides a history of performance over a period of years. The Securities and Exchange Commission requires public companies to disclose financial and other information to help you make sound decisions. You can find the text of these files at
www.sec.gov/edgar.shtml.
From consumeraction.gov
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