Gambling with your future
Financial planner provides information about the different types of investing options avaliable
Alison Pelleymounter
Issue date: 2/20/06 Section: Money/Health
|
For example, the term investment can refer to financial investments, such as stocks and bonds, or non-financial investments, such as gold and diamonds, he said.
Senior Mike Brownlow, an intern at Northwestern Mutual, has invested money and said he would encourage other college-aged people to do the same.
"You need to have your money working for you," he said. "You might as well set something up for the future if you can."
For beginning investors, the task of sorting through possible investments may seem daunting. However, once one takes into consideration his or her age, risk tolerance and investment objectives, they may consider one or more of the following.
Interest-earning savings accounts
Savings accounts at qualified financial institutions are a good option for some students, Egan said, because they offer short-term liquidity, meaning the money put in the account is easily accessible at any time.
Additionally, savings accounts with banks and credit unions are very stable and carry little risk, he said.
Students looking for short-term goals, such as saving for a vacation, car or financial emergency, may choose savings accounts because there is little or no risk of losing principal, however the possibility of gaining principal also is lower than if one invested in stocks or bonds, according to the Financial Planning Association.
Money market accounts
A money market account is similar to a checking account, Egan said, however there are restrictions on how many transactions can be made on the account during a certain period of time.
Money markets tend to have a higher interest rate return than regular checking accounts, but still usually have lower returns than savings accounts, he said.
Certificates of deposit
CDs are like "IOUs" for financial institutions, Egan said.
The bank or credit union takes an individual's money for a certain amount of time, the shortest usually being three months, and, in return, the institution pays interest for the duration of the CD.
Interest earned on CDs is greater than that earned in savings accounts or money markets, however the money is less liquid because it cannot be accessed until the duration of the CD is up.
The FPA recommends individuals place money in CDs if they know they have a large expense coming up at a certain time, such as a vacation or studying abroad.
Government bonds
Bonds issued by the government are another low-risk way for people to invest money. Similar to a CD, bonds are like IOUs, but they are issued by the U.S. Treasury Department.
Unlike CDs, bonds are longer-term investments and therefore the money placed in them is not very liquid, Egan said.
The maturity period for bonds is 30 years.
Bonds are not completely without risk as the amount the bond is worth after its duration is dependent on federal interest rate changes. While it is guaranteed you will receive the amount you depending on interest rates. Therefore, there is a chance the bond will be worth less when it matures.
Corporate bonds
Similar to CDs and government bonds, corporate bonds also are like IOUs, only for corporations.
Bonds typically are issued by individuals at companies looking to finance growth or start-up, according to the Bond Market Association.
Corporate bonds, unlike government bonds, can be issued for any term and usually are issued in multiples of $1000 or $5000.
Corporate bonds also are riskier than government bonds, which are guaranteed by the federal government.
Stocks
When one buys stock in a company, he or she is purchasing an ownership stake in that company, according to the FPA.
Stocks are divided-based on the size, style and sector of the company issuing them and can be bought or sold from either the company or another investor at any time.
How much a share of stock is worth is directly dependent on how much that company is worth, according to the FPA.
For example, if a company is trading 50 million shares of stock at $10 a share, that company is considered to be worth $500 million.
There is no guarantee the stock will increase in price, however the greater the risk, the greater the potential for return
on investment.
Mutual Funds
Some stocks are considered high-risk, and the FPA advises investors diversify their holdings by choosing multiple stocks.
Mutual funds help lessen the risk by allowing an investor to diversify the stocks they are holding.
While the number of stocks included in mutual funds varies, some have more than 5,000 companies included, according to the FPA.
As mutual funds tend to be steadier than investing in stocks, there is less risk of losing money, according to the FPA. Also there is less potential return on investment.