By Dickson Gborglor
Many personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives.
Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and increase their capital or to receive dependable interest income.
Whatever the purpose—saving for your children’s college education or a new home, increasing retirement income or any of a number of other financial goals—investing in bonds can help you achieve your objectives.
That’s especially true for retirement planning. During the past decade, the traditional fixed-benefit retirement plans have increasingly been replaced by defined contribution programs.
Because these plans offer greater individual freedom in selecting from a range of investment options, investors must be increasingly self-reliant in securing their retirement lifestyles.
The diversity of fixed-income securities presents investors with a wide variety of choices to tailor investments to their individual financial objectives.
Whatever your goals, your investment advisor can help explain the numerous investment options available to help you reach them, taking into account your income needs and tolerance for risk.
Your reasons for investing are as unique as you are. To own the house you’ve always pictured in your mind. For a more comfortable retirement. Education for your children. Travel. To indulge in hobbies that are passions. To be able to give more to your place of worship, your alma mater, or other worthy cause. In other words, to realize your own dreams and goals.
No matter what your goals are, it makes sense to invest. Here are some basic reasons to invest now
Long-term growth. Compare the historic performance of equity investments (stocks and bonds) to traditional savings accounts, money market funds and CDs offered by banks and, in the long run, you’ll come out ahead investing in stocks.
The power of compounding. Albert Einstein once said that one of the greatest forces in the universe is the power of compounding. You probably learned that lesson as a kid, putting away some of your allowance and watching your savings grow. Investing takes that power to a new level
It’s never too late! Even if you’re in your sixties or beyond, it’s never too late to start investing. Your funds will still have plenty of time to grow. The sooner you start the greater advantage you should have in compounding time and income-producing years to build toward your retirement…or other goals.
Frequently asked questions about investment
What factors about my financial position should I consider before I invest in securities?
Investors should first make sure that they are sufficiently protected against a financial crisis. Adequate life insurance and emergency funds are among the most important protections. Other financial resources such as Social Security payments, pensions or savings accounts may be used to support you. An emergency fund should consist of easily accessible sources of money. Most emergency funds are placed in savings bonds or savings accounts. Only after you have provided for the unexpected should you think of investing in securities.
What is a good investment?
The type of investment you should have depends in large part on your financial situation and investment objectives. Take into account the risk you are willing to assume, the length of time you can afford to leave it invested, and your fixed obligations. If you plan to use investment income to put children through college, then you probably want an investment that will grow steadily and safely, one that will be liquid when the tuition bills are due. If you want to buy a new car or travel next summer, you may be willing to take some risk for the chance to see your money grow substantially in six months.
How do I open an account at a brokerage firm?
The first steps in becoming a securities investor are selecting a broker and opening an account.
How do I pick a stock or bond?
The first step is to decide what you want your investments to do. Then you should be prepared to spend time researching investment options on the Internet and in financial newspapers and magazines, charts and annual reports. What do you look for? In the case of a conservatively growing stock as an example, look for: size; a long history as a publicly owned company with market popularity; consistent and rising profits; a unique or indispensable service and a good position in the industry; earnings that steadily and adequately cover dividends, with money left to plow back into the company.
What are some good guidelines for investing?
DO have money reserve set aside for emergencies before you invest.
DO remember that there is risk in any investment and select your securities according to the risk you can assume.
DO be selective.
DO ask for facts and advice from a licensed broker-dealer or investment adviser, and be honest with your broker or adviser about your finances, aims and knowledge on the subject.
DO be sure you have knowledge, before you buy, of the terms and quality of the investments that interest you, and that you understand the type of order your broker intends to place for you.
DON'T invest money you may need on short notice.
DON'T disregard quality for the lure of higher yield.
DON'T invest in a company merely because it's in a successful industry. Each company should be considered on its own merits.
DON'T invest on the basis of tips or rumors. They are usually untrustworthy.
DON'T be afraid to say "no" to a broker or to ask your broker or adviser to explain.
What are "common stocks"?
Common stock is an equity interest in a corporation (equity means that you actually own a bit of the company). Generally, each share represents pro rata ownership of the corporation, is entitled to equal dividends with all other shares of the same class, may cast one vote per share for the election of directors or for the approval of major corporate decisions, and participates equally with other common shares in the event of liquidation of the business.
What are "bonds" and "debentures"?
Bonds and debentures, on the other hand, are evidences of loans made to a business in return for a promised rate of return (interest), and a promise to repay the principal or "face" amount of the loan at a fixed date in the future (sometimes sooner, at the option of the company).
What does it mean when a stock is preferred?
Preferred stock is given certain "preferred" treatment over the company's common stock. This preferential treatment usually includes: The right of the owners to receive a fixed dividend before the common stockholders receive any dividend; The rights of the owners to a prior claim on assets of the company after all debts have been paid, should the company ever be dissolved.
Sometimes a preferred dividend is not paid in a given year because the company doesn't earn enough to cover it. If the stock is "cumulative" preferred, and the company misses a dividend, the amount due for that year accrues to the preferred stock owners, and is paid the following year or whenever the company has sufficient earnings to pay it. If the company cannot make the payments on the preferred for a number of years, they continue to accrue during that entire time and will have to be paid in full before the common stockholders receive any dividend payments. If the stock is not cumulative, however, any unpaid dividend may be lost.
Because of these advantages, preferred stockholders are usually limited in their participation in company affairs. They generally have no voting privileges (except when a specified number of preferred dividends are defaulted) and they can usually expect to receive no more than their specified dividend, regardless of how well the company may be doing.
Isn't it always better to invest in stocks that will pay high dividends?
No, not always. It depends on what you're looking for in your investment. If you want regular income from stocks, you should look for a company that has an established policy of paying large cash dividends on a regular basis. But if you are more interested in long-term capital gains (achieved by a higher selling price than purchase price), you should look for a growth stock. Generally, firms with strong growth records pay smaller dividends because they retain their profits to keep the company and its capital stock growing.
How does the bond market work?
It all revolves around one key relationship: when interest rates go up, bond prices go down, and vice versa. Though there are always new issues of bonds, the action is in the secondary market, where you buy bonds secondhand from someone else. The face value, or par value, of a bond is the amount the issuer will pay the owner at maturity. The price people actually pay for the bond, however, depends on how the bond's interest rate compares to the prevailing interest rate.
What are "certificates of deposit"?
Certificates of deposit (or CDs, as they are commonly called) are fixed maturity debt securities with a set rate of interest. They are sold primarily by commercial banks and savings associations as an alternative to other forms of savings instruments and accounts. Maturities range from 30 days to several years. A certificate of deposit is not automatically renewable, although you may generally buy a new one upon maturity. Most CDs are subject to a substantial interest penalty if cashed prior to maturity.
What is an "annuity"?
An annuity is an agreement under which an insurance company will receive a certain amount of money from a person in return for guaranteeing that person a retirement income after a certain age, usually for the remainder of their life. An annuity is the opposite of life insurance. You buy life insurance to provide for those left behind when you die, you buy an annuity to provide for yourself for as long as you live after retirement.
What are "commodities"?
Commodities, in the investment sense, include sugar, wheat, cattle, cotton, tin, gold, various industrial raw materials and many other items. For the commodities speculator, the term refers also to a type of investment called commodity futures contracts," which offer the speculator the possibility of a profit on market price fluctuations. Commodity futures contracts are standardized contracts to purchase a particular quantity of some commodity on a particular date at a particular price. These contracts are traded by hedgers and speculators at prices reflecting the supply of, and demand for, the underlying commodity. Commodity futures are generally considered highly speculative. They provide no income and no guarantee of their future value.
I have been told that life insurance is a good investment . . . is it?
There are two traditional types of life insurance, term and whole life insurance. Term life insurance provides death protection for a specified period of time. Death benefits are paid only if you die within that period. Whole life insurance provides death protection just like term insurance and also builds up cash value, usually at the rate of 3% to 5% per annum. If you choose to surrender (cash in) your whole life insurance policy, the cash is paid to you. If you die while the whole life insurance policy is in effect, the face value will be paid to your beneficiaries. If you have borrowed any cash value of your policy and you die, the amount borrowed will be deducted from the policy value and the difference paid to your beneficiaries.
What is a "mutual fund" and why would I want to invest in it?
A mutual fund (technically known as an investment company) is a corporation or other business entity that uses the money contributed by its shareholders to invest in securities of many different companies, usually with the goal of increasing capital or providing income. Each fund has its own investment strategies and objectives, dividend policies and shareholder services. An investment company provides three things usually not available to the small investor: broader diversification of portfolio, professional management, and constant supervision of investments. Many investment companies also provide investors considerable liquidity. A mutual fund is managed by a professional investment adviser. In return for its services, the adviser is paid a fee called a "management fee" which is most often calculated as a percentage of the fund's average daily assets. Thus, the adviser will profit more when the investor's shares increase in value. Mutual funds are generally recommended for investors who would prefer not to worry about trading securities. If you are thinking about a mutual fund investment, however, be sure to read the fund's prospectus to see what it intends to do with your money.
How do money market funds differ from other types of mutual funds?
A mutual fund is a corporation or other business entity that uses the money contributed by its shareholders to invest in the securities of many different companies, with the primary goal of increasing capital or providing income. Money market funds differ from other types of funds in that: They invest primarily in short term, high interest bearing certificates issued by government business and/or banks, rather than in stocks and bonds;
The average maturity of a money market portfolio is relatively short and fluctuations in asset values are limited; and many investors channel cash which is temporarily idle into money market funds. Such investors may hold money market funds for a short period of time, and may "invest" and "redeem" several times in the course of a year, a pattern very different from the great bulk of investors in other mutual funds. Money market funds provide an opportunity previously unavailable to investors with limited cash to take advantage of periods of high interest rates and to obtain good yields in the open money market.
Financial advisers warn that sharp changes in interest rates may have unpleasant consequences for money market investors. If rates increase abruptly, the yields of money market funds will follow. If interest rates drop sharply, chances are that stock and bond markets will be quite active, costing slow-moving investors lost opportunities.
What are "stock options"?
Stock options are a rather complicated form of investment which has recently attained a degree of popularity among more sophisticated investors. Let's look first at the idea of options in general.
You probably know when you lease a house with an option to buy, this means that any time within a stated period you have a right to purchase that house at the agreed price. If you wish, however, you may ignore the opportunity altogether and let the option lapse. You alone make the decision.
It could be that during the option period the house increases handsomely in value so it would be advantageous for you to exercise the option to buy it at the lower price previously agreed upon. If, however, the house goes down in value during the option period you may let the option expire; then, what you spent for the option is likely less than the loss you might have suffered had you purchased the house in the first place. Stock options work this way too.
You may buy an option from someone who is willing to sell his or her shares at a specified price within a stated time. If the market price of the shares underlying the option rises above the agreed price (called the "strike" price) plus the price of the option it is economically advantageous for you to exercise your option and buy these shares.
Presumably, you could then sell them in the market and realize a profit. On the other hand, if the market price of the underlying shares does not increase sufficiently to give you a profit on the transaction, you may let your option lapse and your only cost is the price you paid to obtain the option (sometimes called the "premium").
What is a "prospectus"?
A prospectus is a document given to potential investors in connection with a public offering of securities. It is intended to provide investors with a written statement of all relevant information about the company -- its history, operations, financial condition and key personnel. A prospectus is required by law; it provides information but not an endorsement.
What is "P-E or price-earnings ratio"?
This is a figure that helps the investor judge whether a stock is priced too high or too low. Corporations get this figure by dividing the corporation's earnings for the year by the number of shares of stock outstanding (that have been sold throughout the corporation's history and are still out in the hands of investors). That gives an "earnings per share" figure. To get the price-earnings ratio, the earnings per share is divided into the current price of the stock. If a particular stock is selling for $10.00 a share and the company is earning 50 cents per share, you divide 50 cents into $10.00 and get 20. The P-E ratio is 20 to 1.
Many personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives.
Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and increase their capital or to receive dependable interest income.
Whatever the purpose—saving for your children’s college education or a new home, increasing retirement income or any of a number of other financial goals—investing in bonds can help you achieve your objectives.
That’s especially true for retirement planning. During the past decade, the traditional fixed-benefit retirement plans have increasingly been replaced by defined contribution programs.
Because these plans offer greater individual freedom in selecting from a range of investment options, investors must be increasingly self-reliant in securing their retirement lifestyles.
The diversity of fixed-income securities presents investors with a wide variety of choices to tailor investments to their individual financial objectives.
Whatever your goals, your investment advisor can help explain the numerous investment options available to help you reach them, taking into account your income needs and tolerance for risk.
Your reasons for investing are as unique as you are. To own the house you’ve always pictured in your mind. For a more comfortable retirement. Education for your children. Travel. To indulge in hobbies that are passions. To be able to give more to your place of worship, your alma mater, or other worthy cause. In other words, to realize your own dreams and goals.
No matter what your goals are, it makes sense to invest. Here are some basic reasons to invest now
Long-term growth. Compare the historic performance of equity investments (stocks and bonds) to traditional savings accounts, money market funds and CDs offered by banks and, in the long run, you’ll come out ahead investing in stocks.
The power of compounding. Albert Einstein once said that one of the greatest forces in the universe is the power of compounding. You probably learned that lesson as a kid, putting away some of your allowance and watching your savings grow. Investing takes that power to a new level
It’s never too late! Even if you’re in your sixties or beyond, it’s never too late to start investing. Your funds will still have plenty of time to grow. The sooner you start the greater advantage you should have in compounding time and income-producing years to build toward your retirement…or other goals.
Frequently asked questions about investment
What factors about my financial position should I consider before I invest in securities?
Investors should first make sure that they are sufficiently protected against a financial crisis. Adequate life insurance and emergency funds are among the most important protections. Other financial resources such as Social Security payments, pensions or savings accounts may be used to support you. An emergency fund should consist of easily accessible sources of money. Most emergency funds are placed in savings bonds or savings accounts. Only after you have provided for the unexpected should you think of investing in securities.
What is a good investment?
The type of investment you should have depends in large part on your financial situation and investment objectives. Take into account the risk you are willing to assume, the length of time you can afford to leave it invested, and your fixed obligations. If you plan to use investment income to put children through college, then you probably want an investment that will grow steadily and safely, one that will be liquid when the tuition bills are due. If you want to buy a new car or travel next summer, you may be willing to take some risk for the chance to see your money grow substantially in six months.
How do I open an account at a brokerage firm?
The first steps in becoming a securities investor are selecting a broker and opening an account.
How do I pick a stock or bond?
The first step is to decide what you want your investments to do. Then you should be prepared to spend time researching investment options on the Internet and in financial newspapers and magazines, charts and annual reports. What do you look for? In the case of a conservatively growing stock as an example, look for: size; a long history as a publicly owned company with market popularity; consistent and rising profits; a unique or indispensable service and a good position in the industry; earnings that steadily and adequately cover dividends, with money left to plow back into the company.
What are some good guidelines for investing?
DO have money reserve set aside for emergencies before you invest.
DO remember that there is risk in any investment and select your securities according to the risk you can assume.
DO be selective.
DO ask for facts and advice from a licensed broker-dealer or investment adviser, and be honest with your broker or adviser about your finances, aims and knowledge on the subject.
DO be sure you have knowledge, before you buy, of the terms and quality of the investments that interest you, and that you understand the type of order your broker intends to place for you.
DON'T invest money you may need on short notice.
DON'T disregard quality for the lure of higher yield.
DON'T invest in a company merely because it's in a successful industry. Each company should be considered on its own merits.
DON'T invest on the basis of tips or rumors. They are usually untrustworthy.
DON'T be afraid to say "no" to a broker or to ask your broker or adviser to explain.
What are "common stocks"?
Common stock is an equity interest in a corporation (equity means that you actually own a bit of the company). Generally, each share represents pro rata ownership of the corporation, is entitled to equal dividends with all other shares of the same class, may cast one vote per share for the election of directors or for the approval of major corporate decisions, and participates equally with other common shares in the event of liquidation of the business.
What are "bonds" and "debentures"?
Bonds and debentures, on the other hand, are evidences of loans made to a business in return for a promised rate of return (interest), and a promise to repay the principal or "face" amount of the loan at a fixed date in the future (sometimes sooner, at the option of the company).
What does it mean when a stock is preferred?
Preferred stock is given certain "preferred" treatment over the company's common stock. This preferential treatment usually includes: The right of the owners to receive a fixed dividend before the common stockholders receive any dividend; The rights of the owners to a prior claim on assets of the company after all debts have been paid, should the company ever be dissolved.
Sometimes a preferred dividend is not paid in a given year because the company doesn't earn enough to cover it. If the stock is "cumulative" preferred, and the company misses a dividend, the amount due for that year accrues to the preferred stock owners, and is paid the following year or whenever the company has sufficient earnings to pay it. If the company cannot make the payments on the preferred for a number of years, they continue to accrue during that entire time and will have to be paid in full before the common stockholders receive any dividend payments. If the stock is not cumulative, however, any unpaid dividend may be lost.
Because of these advantages, preferred stockholders are usually limited in their participation in company affairs. They generally have no voting privileges (except when a specified number of preferred dividends are defaulted) and they can usually expect to receive no more than their specified dividend, regardless of how well the company may be doing.
Isn't it always better to invest in stocks that will pay high dividends?
No, not always. It depends on what you're looking for in your investment. If you want regular income from stocks, you should look for a company that has an established policy of paying large cash dividends on a regular basis. But if you are more interested in long-term capital gains (achieved by a higher selling price than purchase price), you should look for a growth stock. Generally, firms with strong growth records pay smaller dividends because they retain their profits to keep the company and its capital stock growing.
How does the bond market work?
It all revolves around one key relationship: when interest rates go up, bond prices go down, and vice versa. Though there are always new issues of bonds, the action is in the secondary market, where you buy bonds secondhand from someone else. The face value, or par value, of a bond is the amount the issuer will pay the owner at maturity. The price people actually pay for the bond, however, depends on how the bond's interest rate compares to the prevailing interest rate.
What are "certificates of deposit"?
Certificates of deposit (or CDs, as they are commonly called) are fixed maturity debt securities with a set rate of interest. They are sold primarily by commercial banks and savings associations as an alternative to other forms of savings instruments and accounts. Maturities range from 30 days to several years. A certificate of deposit is not automatically renewable, although you may generally buy a new one upon maturity. Most CDs are subject to a substantial interest penalty if cashed prior to maturity.
What is an "annuity"?
An annuity is an agreement under which an insurance company will receive a certain amount of money from a person in return for guaranteeing that person a retirement income after a certain age, usually for the remainder of their life. An annuity is the opposite of life insurance. You buy life insurance to provide for those left behind when you die, you buy an annuity to provide for yourself for as long as you live after retirement.
What are "commodities"?
Commodities, in the investment sense, include sugar, wheat, cattle, cotton, tin, gold, various industrial raw materials and many other items. For the commodities speculator, the term refers also to a type of investment called commodity futures contracts," which offer the speculator the possibility of a profit on market price fluctuations. Commodity futures contracts are standardized contracts to purchase a particular quantity of some commodity on a particular date at a particular price. These contracts are traded by hedgers and speculators at prices reflecting the supply of, and demand for, the underlying commodity. Commodity futures are generally considered highly speculative. They provide no income and no guarantee of their future value.
I have been told that life insurance is a good investment . . . is it?
There are two traditional types of life insurance, term and whole life insurance. Term life insurance provides death protection for a specified period of time. Death benefits are paid only if you die within that period. Whole life insurance provides death protection just like term insurance and also builds up cash value, usually at the rate of 3% to 5% per annum. If you choose to surrender (cash in) your whole life insurance policy, the cash is paid to you. If you die while the whole life insurance policy is in effect, the face value will be paid to your beneficiaries. If you have borrowed any cash value of your policy and you die, the amount borrowed will be deducted from the policy value and the difference paid to your beneficiaries.
What is a "mutual fund" and why would I want to invest in it?
A mutual fund (technically known as an investment company) is a corporation or other business entity that uses the money contributed by its shareholders to invest in securities of many different companies, usually with the goal of increasing capital or providing income. Each fund has its own investment strategies and objectives, dividend policies and shareholder services. An investment company provides three things usually not available to the small investor: broader diversification of portfolio, professional management, and constant supervision of investments. Many investment companies also provide investors considerable liquidity. A mutual fund is managed by a professional investment adviser. In return for its services, the adviser is paid a fee called a "management fee" which is most often calculated as a percentage of the fund's average daily assets. Thus, the adviser will profit more when the investor's shares increase in value. Mutual funds are generally recommended for investors who would prefer not to worry about trading securities. If you are thinking about a mutual fund investment, however, be sure to read the fund's prospectus to see what it intends to do with your money.
How do money market funds differ from other types of mutual funds?
A mutual fund is a corporation or other business entity that uses the money contributed by its shareholders to invest in the securities of many different companies, with the primary goal of increasing capital or providing income. Money market funds differ from other types of funds in that: They invest primarily in short term, high interest bearing certificates issued by government business and/or banks, rather than in stocks and bonds;
The average maturity of a money market portfolio is relatively short and fluctuations in asset values are limited; and many investors channel cash which is temporarily idle into money market funds. Such investors may hold money market funds for a short period of time, and may "invest" and "redeem" several times in the course of a year, a pattern very different from the great bulk of investors in other mutual funds. Money market funds provide an opportunity previously unavailable to investors with limited cash to take advantage of periods of high interest rates and to obtain good yields in the open money market.
Financial advisers warn that sharp changes in interest rates may have unpleasant consequences for money market investors. If rates increase abruptly, the yields of money market funds will follow. If interest rates drop sharply, chances are that stock and bond markets will be quite active, costing slow-moving investors lost opportunities.
What are "stock options"?
Stock options are a rather complicated form of investment which has recently attained a degree of popularity among more sophisticated investors. Let's look first at the idea of options in general.
You probably know when you lease a house with an option to buy, this means that any time within a stated period you have a right to purchase that house at the agreed price. If you wish, however, you may ignore the opportunity altogether and let the option lapse. You alone make the decision.
It could be that during the option period the house increases handsomely in value so it would be advantageous for you to exercise the option to buy it at the lower price previously agreed upon. If, however, the house goes down in value during the option period you may let the option expire; then, what you spent for the option is likely less than the loss you might have suffered had you purchased the house in the first place. Stock options work this way too.
You may buy an option from someone who is willing to sell his or her shares at a specified price within a stated time. If the market price of the shares underlying the option rises above the agreed price (called the "strike" price) plus the price of the option it is economically advantageous for you to exercise your option and buy these shares.
Presumably, you could then sell them in the market and realize a profit. On the other hand, if the market price of the underlying shares does not increase sufficiently to give you a profit on the transaction, you may let your option lapse and your only cost is the price you paid to obtain the option (sometimes called the "premium").
What is a "prospectus"?
A prospectus is a document given to potential investors in connection with a public offering of securities. It is intended to provide investors with a written statement of all relevant information about the company -- its history, operations, financial condition and key personnel. A prospectus is required by law; it provides information but not an endorsement.
What is "P-E or price-earnings ratio"?
This is a figure that helps the investor judge whether a stock is priced too high or too low. Corporations get this figure by dividing the corporation's earnings for the year by the number of shares of stock outstanding (that have been sold throughout the corporation's history and are still out in the hands of investors). That gives an "earnings per share" figure. To get the price-earnings ratio, the earnings per share is divided into the current price of the stock. If a particular stock is selling for $10.00 a share and the company is earning 50 cents per share, you divide 50 cents into $10.00 and get 20. The P-E ratio is 20 to 1.
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