Do you want to invest your money in the stock market and don’t know where to start? Here’s some information to help you.
First of all, how much money do you want to invest? Decide on this. Any amount is good. It’s not so much the amount of money that matters. What’s important is your risk profile, your time horizon and the savings you make. You can start with a small amount of money and then, as you get confidence, increase it to larger amounts. The important thing is to make a beginning.
Types Of Investment
There are three main areas you can invest in – Savings vehicles, Bonds and Stocks.
Apart from cash, savings vehicles comprise savings/checking accounts and money market funds. Certificate of Deposit, or CD, is a deposit you make in a bank for a set period of time, say 6 months or 2 years. CDs are guaranteed by the FDIC up to $100,000 and are taxable. The rate of interest is fixed, though the longer your time period, the higher will be the rate of interest.
Sometimes investment companies manage a large amount of money that has been pooled in by different investors. The companies invest this money in very safe and liquid securities. These funds are known as money market funds. You normally need to invest a minimum amount, say $5000. You earn a monthly interest and the risk factor is quite small. The downside is that these funds are not insured by the FDIC.
Bonds are basically loans you make to an institution, which could be the federal or state government, a local municipality or a company. When you give them a loan, they give you an IOU which is a bond. They promise to pay you back the principal amount with a fixed rate of interest. It is for this reason that bonds are also known as fixed income securities. Most bonds are issued by three institutions: the US government or federal agencies, the state and local governments and corporations.
US government bonds are also known as Treasuries. There are four kinds of Treasuries.
• Notes with maturities from 2 to 10 years
• Bills with maturities from 3 months to a year
• Bonds with maturities over 10 to 30 years
• Savings bonds that you can redeem after a period of 5 years.
These are designed for small investors
All Treasuries are guaranteed by the government, hence are the safest investment you can make. You don’t have to pay any tax on the interest income you make. For all Treasuries except savings bonds, you have to make a minimum investment of $1000.
Municipal bonds are offered by local municipalities. Again, the interest income here is tax free. The downside is that the interest rate on these bonds is much lower than other types of taxable bonds.
Corporate bonds are the riskiest of all bonds. There are three types of corporate bonds.
• Short term which is 1 to 5 years
• Intermediate term which is 5 to 15 years
• Long term which is over 15 years
Since there is more risk involved, corporate bonds give you a higher rate of interest than other bonds.
Investments in stocks give the highest returns but are also the riskiest of all investments. Every individual investment in stocks is called a share. Returns are received through dividends and profit that is gained from the sale of your stock. Before investing in the stock market, you have to be very clear about your plans and goals. You must also do your research thoroughly. The stock market is very unpredictable and the best way to invest in it is to go for the long term.