Common Investments Simplified

By | February 22, 2012

I don’t know about you, but when I was first introduced to the world of financial investing, most of the terminology and investment types went over my head.  Seriously, what is the difference between a Mutual Fund and Money Market Mutual Fund, or a Roth IRA and Traditional IRA?  All I want to do is make money with my money, and this seemed simple enough initially.  Below you’ll find simplified accounts of the most common forms of investments so that you can better understand them and decide if they’re right for you.

CDs – Low risk, low potential of return

CDs, or Certificate of Deposit Investments, are what many Americans turn to when they want a low risk investment.  CDs are pretty simple.  You deposit consecutive amounts of money into an account with your bank and make interest on that money.  When setting up a CD, you and your banker decide how long you want to invest in your CD (i.e. how long it will take for your CD to mature), at what intervals you will deposit money, and the fixed amount you will deposit each time.  Typically, CDs mature anywhere between 21 days and 10 years.  When your investment meets its maturity date, your bank will give you back the money you invested as well as your investment’s accrued interest.  “Accrued” interest is money you’ve made on your money over the length of your investment.  So, if you invested $100 into a CD and gained 1 dollar a day for 21 days in interest, you have accrued $21 on your investment; so at the investments maturity date, your bank will give you $121.

IRAs – Low risk, low/medium return

IRAs, or Individual Retirement Accounts, are long-term money investments meant to be used during retirement.  Essentially, you open an IRA and make deposits up to the maximum annual limit.  For this year, that amount is $5,000, though the maximum amount that you may contribute to an IRA increases once you are 50 years old.  You gain interest on that money over time and users benefit from tax breaks.  The idea behind an IRA is that you invest over a long term and don’t touch your invested money until retirement.  There are two main types of IRAs, Traditional and Roth.

Those people with a Traditional IRA cannot withdraw any money from their IRA without penalty, excluding the few specified situations that do allow withdrawal such as buying a house.  Traditional IRA users deposit money into their IRAs tax free, but must pay taxes when they withdraw money during their retirement.  They cannot make any new deposits and must begin withdrawing funds when they reach 70.5 years of age.

Those people with Roth IRAs, on the other hand, may withdraw any money they’ve put into their IRA without fee.  They are taxed when they put money into their IRA and are not taxed when they withdraw money during retirement.  They do not have to withdraw money at any particular age and may continue making deposits into their IRA passed the age of 70.5. Also you should be aware that there are some awesome tax software packages on the market that can guide you through the maze of tax related issues for seniors. Turbo Tax now has a new Turbo Tax Military edition that can  also assist our heroes in the armed forces.

Money Market Mutual Funds – Low/medium risk, low/medium potential for return

Money market mutual funds are professionally managed investments into money market instruments, e.g. Treasury bills, short-term tax-exempt municipal securities, and negotiable bank CDs; these instruments have very short maturity dates and are fixed income securities, meaning you must make scheduled deposits.  These are relatively low risk and will make you more money than a basic savings account, which is why many opt for them instead.

Stocks – High risk, high potential of return

Stocks are essentially small pieces of a publicly traded company that you can buy.  Every day, the prices of a company’s stocks fluctuate.  If stock prices rise above the price you paid per stock, you make money; if the price decreases to below what you paid for each stock, you lose money.  Because stock prices are relatively unpredictable, they are both very risky and have a high potential for you to make money if you invest wisely.

Stock Mutual Funds – Medium risk, medium potential of return

Stock mutual funds are very similar to money market mutual funds except that they are investments into groups of stocks and other securities that are less risky than investing in single stocks.  A professional manages your mutual funds.  Stock mutual funds are more risky that money market mutual funds because stocks are more risky than the money market instruments to which brokers invest.  Stock mutual funds are less risky than investing directly into a multiple single stocks because you invest in a group of stocks versus a single one.  If one particular stock in your group isn’t doing well, the others may be doing well; essentially, you have the potential of losing less because other stocks in your group can make up for losses of that single stock.

T-Bills – Low risk, low potential of return

T-Bills, or Treasury Bills, are a bill sold to consumers by the U.S. Treasury.  Consumers buy them for less than the amount that they will be worth at maturity.  For instance, you might buy a treasury bill for $180 that will be worth $200 when it reaches its maturity date.  The interest rates, and thus prices, for buying treasury bills fluctuate, which means that when you buy them matters.

 

Sara Witt is a guest blogger bringing to us common investments simplified.  A writer from www.personalinjuryattorney.org, Sara spends much of her time writing about how to determine a legitimately good personal injury lawyer from one that falsely presents him or herself.

 

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