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The Three Different Kinds of Basic Investments Include Stocks, Bonds and Cash.

There are also three types of investors: conservative, moderate and aggressive.
Each one of these types of investment have numerous types of investment vehicles that fall under them. For example, there are mutual funds for each category.

Common Stock - Common Stock is a term that you will hear quite often. Anyone can purchase common stock, regardless of age, income or financial standing. Common stock is essentially part ownership in the business you are investing in. As the company grows and earns money, the value of your stock rises. On the other hand, if the company does poorly or goes bankrupt, the value of your stock falls. Common stock holders do not participate in the day to day operations of a business, but they do have the power to elect the board of directors.

Class A or B Stock - Along with common stock, there are also different classes of stock. The different classes of stock in one company are often called Class A and Class B. The first class, class A, essentially gives the stock owner more votes per share of stock than the owners of class B stock. The ability to create different classes of stock in a corporation has existed since 1987. Many investors avoid stock that has more than one class, and stocks that have more than one class are not called common stock.

Preferred Stock - The most upscale type of stock is of course Preferred Stock. Preferred stock isn't exactly a stock. It is a mix of a stock and a bond. The owner's of preferred stock can lay claim to the assets of the company in the case of bankruptcy, and preferred stock holders get the proceeds of the profits from a company before the common stock owners. If you think that you may prefer this preferred stock, be aware that the company typically has the right to buy the stock back from the stock owner and stop paying dividends.

Investing in bonds is very safe, and the returns are usually very good. There are four basic types of bonds available and they are sold through the Government, through corporations, state and local governments, and foreign governments.

The United States Government sells Treasury Bonds through the Treasury Department. You can purchase Treasury Bonds with maturity dates ranging from three months to thirty years. Treasury bonds include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and Treasury Bonds. All Treasury bonds are backed by the United States Government, and tax is only charged on the interest that the bonds earn.

Corporate bonds are sold through public securities markets. A corporate bond is essentially a company selling its debt. Corporate bonds usually have high interest rates, but they are a bit risky. If the company goes belly-up, the bond is worthless.

State and local Governments also sell bonds. Unlike bonds issued by the federal government, these bonds usually have higher interest rates. This is because State and Local Governments can indeed go bankrupt, unlike the federal government. State and Local Government bonds are free from income taxes on the interest. State and local taxes may also be waived. Tax-free Municipal Bonds are common State and Local Government Bonds.

Purchasing foreign bonds is actually very difficult, and is often done as part of a mutual fund. It is often very risky to invest in foreign countries. The safest type of bond to buy is one that is issued by the US Government.

Understanding Bonds

The three most important things that must be considered when purchasing a bond include the par value, the maturity date, and the coupon rate. The par value of a bond refers to the amount of money you will receive when the bond reaches its maturity date. In other words, you will receive your initial investment back when the bond reaches maturity. The maturity date is of course the date that the bond will reach its full value. On this date, you will receive your initial investment, plus the interest that your money has earned. Corporate and State and Local Government bonds can be "called" before they reach their maturity, at which time the corporation or issuing Government will return your initial investment, along with the interest that it has earned thus far. Federal bonds cannot be "called." The coupon rate is the interest that you will receive when the bond reaches maturity. This number is written as a percentage, and you must use other information to find out what the interest will be. A bond that has a par value of $2000, with a coupon rate of 5% would earn $100 per year until it reaches maturity.

Each individual has a risk tolerance that should not be ignored. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Then, they should work with you to find investments that do not exceed your risk tolerance. Determining one's risk tolerance involves several different things. First, you need to know how much money you have to invest, and what your investment and financial goals are.

For instance, if you plan to retire in ten years, and you've not saved a single penny towards that end, you need to have a high risk tolerance - because you will need to do some aggressive " risky " investing in order to reach your financial goal. On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance will be low. You can afford to watch your money grow slowly over time.

Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there is a lot in determining your tolerance. For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do? Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out, if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

There are several different types of investments, and there are many factors in determining where you should invest your funds. Of course, determining where you will invest begins with researching the various available types of investments, determining your risk tolerance, and determining your investment style, along with your financial goals.

If you were going to purchase a new car, you would do quite a bit of research before making a final decision and a purchase. You would never consider purchasing a car that you had not fully looked over and taken for a test drive. Investing works much the same way. You will of course learn as much about the investment as possible, and you would want to see how past investors have done as well. It's common sense!

Learning about the stock market and investments takes a lot of time but it is time well spent. There are numerous books and websites on the topic, and you can even take college level courses on the topic which is what stock brokers do. With access to the Internet, you can actually play the stock market with fake money to get a feel for how it works. You can make pretend investments, and see how they do. Do a search with any search engine for Stock Market Games or Stock Market Simulations. This is a great way to start learning about investing in the stock market.

If you are ready to invest money for a future event, such as retirement or a child's college education, you have several options. You do not have to invest in risky stocks or ventures. You can easily invest your money in ways that are very safe, which will show a decent return over a long period of time.

  1. First consider bonds. There are various types of bonds that you can purchase. Bonds are similar to Certificates of Deposit. Instead of being issued by banks, however, bonds are issued by the Government. Depending on the type of bonds that you buy, your initial investment may double over a specific period of time.
  2. Mutual funds are also relatively safe. Mutual funds exist when a group of investors put their money together to buy stocks, bonds, or other investments. A fund manager typically decides how the money will be invested. All you need to do is find a reputable, qualified broker who handles mutual funds, and he or she will invest your money, along with other client's money. Mutual funds are a bit riskier than bonds.
  3. Stocks are another vehicle for long term investments. Shares of stocks are essentially shares of ownership in the company you are investing in. When the company does well financially, the value of your stock rises. However, if a company is doing poorly, your stock value drops. Stocks, of course, are even riskier than Mutual funds. Even though there is a greater amount of risk, you can still purchase stock in sound companies, such as GE, and sleep at night knowing that your money is relatively safe.
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The important thing is to do your research before investing your money for long term gain. When purchasing stocks you should choose stocks that are well established. When you look for a mutual fund to invest in, choose a broker that is well established and has a proven track record. If you aren't quite ready to take the risks involved with mutual funds or stocks, at the very least invest in bonds that are guaranteed by the Government.

If you're taking a vacation, you plan carefully. You decide on a foliage tour or a visit to a theme park, a bed and breakfast or a condominium, one week or two. You try to avoid common "traps" of vacation travel -- crowds, long waits, and high prices. Investing for retirement is a lot like vacation planning: the more carefully you choose your strategies, the more comfortable you expect to be when you retire. And, like vacation planning, you need to avoid investing traps that can snare your savings.

Watch the Store - To reach your goals, monitor your investments. Correct mistakes quickly. A frequent error investors make is to carefully design their retirement investment strategy and then expect it to perform on automatic pilot. Look at your account regularly to be sure your investments are performing as you anticipated. If, over a reasonable time, your investments don't meet your needs, make any necessary changes.

Don't Overdo It - You're investing for retirement and that's a long-term proposition. Don't worry about daily market gyrations. If you sell every time an investment declines slightly, you'll not only forego some good opportunities for capital appreciation, but you'll also never have a restful moment. By matching your mutual fund's performance against that of similar funds and appropriate benchmarks, you'll be better equipped to spot a trend that's not just a flash in the pan. A quarterly check can tell you whether your fund is under-performing or keeping up with its peers and relative benchmarks.

Don't Be Too Conservative - If you invest all of your money in a money market or similar fund, your risk may decrease but so will your return potential. Investing in funds that seek to preserve your principal means that your return probably won't do much more than keep up with the current inflation rate. To have enough money for a comfortable retirement, you need some investments that offer long-term growth potential. Diversifying your investments among different asset classes can help to reduce your risk. When you diversify, you put some of your money in conservative investments such as market funds or even corporate or government bonds and the rest in investments that seek higher returns although typically at a higher level of risk.

Don't Make Unnecessary Withdrawals - In a financial crunch, you may be tempted to take money out of your retirement account. But, if you take an early withdrawal, you may be subject to a penalty as well as income tax at your current ordinary income tax rate. Just remember that any money you withdraw from your account is not being invested for your future. Bottom line: Leave your money invested until you retire.

The difference between the amount for which you sell the capital asset and your basis, which is usually what you paid for it, is a capital gain or a capital loss. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Your basis is generally your cost plus improvements. You must keep accurate records that show your basis. Your records should show the purchase price, including commissions; increases to basis, such as the cost of improvements; and decreases to basis, such as depreciation, non-dividend distributions on stock, and stock splits.

Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040, U.S. Individual Income Tax Return. Capital gains and losses are classified as long-term or short term. If you hold the asset for more than one year, your capital gain or loss is long-term. If you hold the asset one year or less, your capital gain or loss is short-term. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of the property.

Don't put all of your eggs in one basket! You've probably heard that over and over again throughout your life ... and when it comes to investing, it is very true. Diversification is the key to successful investing. All successful investors build portfolios that are widely diversified, and you should too!

Diversifying your investments might include purchasing various stocks in many different industries. It may include purchasing bonds, investing in money market accounts, or even in some real property. The key is to invest in several different areas not just one.

Over time, research has shown that investors who have diversified portfolios usually see more consistent and stable returns on their investments than those who just invest in one thing. By investing in several different markets, you will actually be at less risk also.

For instance, if you have invested all of your money in one stock, and that stock takes a significant plunge, you will most likely find that you have lost all of your money. On the other hand, if you have invested in ten different stocks, and nine are doing well while one plunges, you are still in reasonably good shape.

A good diversification will usually include stocks, bonds, real property, and cash. It may take time to diversify your portfolio. Depending on how much you have to initially invest, you may have to start with one type of investment, and invest in other areas as time goes by. This is okay, but if you can divide your initial investment funds among various types of investments, you will find that you have a lower risk of losing your money, and over time, you will see better returns.

Experts also suggest that you spread your investment money evenly among your investments. In other words, if you start with $100,000 to invest, invest $25,000 in stocks, $25,000 in real property, $25,000 in bonds, and put $25,000 in an interest bearing savings account.

Now is a good time to invest in your home.

If you sell your residence, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). To exclude the gain, you must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Generally, you cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude gain, you must include it in income. To determine the maximum dollar limit you can exclude and for additional information, contact your Cook and Company Agent. Note: You cannot deduct a loss on the sale of your home.

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