Sunday, March 2, 2008

Intro to Investing Part Two

I started the other day giving readers a solid base of information on where they can put their money to make it work for them. I started with Mutual Funds, DRIPS, and Savings Accounts. Here are a few other ways to make your money work for you as opposed to sitting idle...

Index Funds - Like a mutual fund, but has a portfolio put together to match or track a market index (S&P 500, Financials). A benefit to this is you get good market exposure and because it is not as actively managed as mutual funds the operating expenses are lower and the funds tend to have much lower turnover with the holdings which can be beneficial at tax time. Because of the lower expenses and the broad exposure, index funds are said to beat other forms of investments, and it is passive investing, so you dont have to keep an eye on it from day to day and trade. You can buy these anywhere (Scottrade, Schwab, E*Trade), some like many things, may have minimums. But, as Ive mentioned before, you can usually waive the minimum purchase by setting up for an automatic investing plan where they will pull $50 or $100 out of your account monthly to invest in.

Bonds - With bond you are pretty much just loaning money to the government, or the corporation that you purchase the bond through. They have a set period of time, and they have a set interest rate. They are used by various entities (states, US government, companies) to get cash flow for projects they want to undetake. These are fixed income investments, you know how much money you are going to get when you invest in these. You can purchase them from a 30 day period of time up to years. A major concern with bonds is the credit rating of the issuer, you want to buy bonds from a a company with good credit, but by doing so, you get a lower rate of return. Adversely, if you buy bonds from a company with a lower credit rating, the interest rate will be higher, because of course, the risk is higher. Just like lendning money to a friend...if they are trustworthy, they have a good flow of incomes, your likely to loan them money, and if you charged interest it would be a lower rate then if you were going to lend money to a kid with no job, whos shady and you never know if you are going to get it back (I dont know why you'd ever lend to the second guy, but you get my point).

Stocks - The infamous stocks...when you buy shares of stock in a company, you own part of the company...depending on how large of a position will determine what percentage of the company. Common stock is the type of stock most of us would like to get familiar with, and you can buy and sell these through out the day as the price goes up and down. When you look to buy stocks you want to think that way too...you want to think about it in a sense that, I am going to be part owner of this company, do I feel its a good enough company to buy into? Thats the general idea of stocks, and there will be many more articles going far more into detail about stocks, if you have questions let me know, but stocks will be a major part of my talking on this blog. Also, stocks for the most part, have historically outperformed the investment vehicles that you are fmailar with.

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