Now that you’ve determined your risk factor, and have chosen your investment style along with a source of financial advice, it’s finally time to start investing beyond your existing retirement funds.
You may choose to start with a low-risk investment vehicle, such as a bond, a certificate or a money market fund. Or, you may decide you’re ready for something a little more risky, like a stock.
Here’s a list of investment vehicles and what you need to know about each choice. Our list begins with the lowest-risk options and progressively gets riskier. Find the vehicle that most suits your needs and personality, and then start investing!
A bond is essentially a loan to a company or to the government. Suppose the city you live in wants to build a park. The city may choose to sell bonds to fund this project. In exchange, they will make regular “coupon” payments at a fixed percentage to all investors. At the end of the bond term – typically 10 years – the city will pay back the initial investment. Thus, a bond holds no risk to the investor and a guaranteed promise of growth.
Bonds have a noticeable lack of the volatility that is common in stock investments. However, because of the minimal risk, there is also minimal growth. Your gains are fixed and not dependent on the success of your investment. While it’s not as exciting as a stock that has the potential to earn you huge returns, a bond is nonetheless a safe, secure place to start investing.
Share Savings Certificates (similar to CDs)
A share savings certificate (aka, certificate) is like a certificate of deposit. It is the most straightforward investment you can make. You can even set one up at [credit union]!
With it, you are trading in the right to withdraw your money for a specific length of time while it is on deposit with a financial institution. In return, you receive a set dividend rate for that period, and it is not subject to change, regardless of what happens to general interest rates. You are required to keep the money in the certificate until maturity of the term length. Withdrawing cash early will net you a penalty that is generally equal to three months’ worth of dividends.
The amount you’ll earn with a certificate is dependent on the term and the rate being paid at the time of account opening. However, even if current rates are low, if you lock in your money for a while, you can earn more than a general savings rate, making certificates a great low-risk investment.
Money Market Funds
When you buy a money market fund, you are buying a pool of investments, automatically creating diversification and minimizing risk. Typically, a money market fund will include CDs and short-term bonds, along with other low-risk investments. They are usually sold by brokerage firms and mutual fund companies.
Unlike CDs, money market funds are liquid, which means you can withdraw your deposits without waiting for a maturity date.
Many well-established companies pay dividends on their stocks that are higher than what you can get on safer investments like CDs . As stocks, though, they are naturally not as safe as fixed-income securities.
Dividend-paying stocks are a great option because they combine a fixed income with the possibility for growth. Also, in case of a declining market, you can still earn income from your stock, even when the price of your shares fluctuates. They are often the ideal choice in a bear market, which is when investors look toward income-producing stock over growth.
If you feel ready to dip into the general stock market, there is still some work you should consider. Before you plunk down your money, carefully research your chosen company. Don’t buy a single stock without having a clear understanding of that company’s current financial situation.
Begin your research with:
1. The company’s annual report
2. The 10K and 10Q reports that the company files with the SEC
3. Standard & Poor‘s Stock Reports
4. Value Line Investment Survey
5. The Wall Street Journal and/or Investor‘s Business Daily
If you find leafing through a newspaper or reams of a report to be tedious, you don’t have to resort to blind investing. With the information superhighway, research is easier than ever. The following list of resources are available online and will clue you in to your company’s financial standing:
2. Financial Sense
4. King World News
6. The Ludwig von Mises Institute
8. The U.S. Securities and Exchange Commission