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Financial Preparation

ABC’s of Investing

Definitions

Equity Investment
By owning stock in a company you become a partial owner of the company and participate in its earnings by receiving dividends.

Fixed Investment
You are loaning your money to a company or the government in exchange for a bond. The bond will have a stated maturity (when you will get your money back) and a stated rate of interest (sometimes referred to as the coupon) that you will receive.

Cash
Sometimes referred to as “liquid” assets, these are usually held in savings accounts or money market accounts.

Time Horizons

The number of years until you will need the money to fund a specific goal

Short-term — Now to 3 years from now (e.g., money for car repairs)

Mid-term — 4 to 8 years (e.g., money for a new car)

Long term — 8 years and beyond (e.g., children’s education; retirement)

The length of time until you need the funds will determine your investment strategy and which type of product is appropriate for you.

Risks of Investing

Investment Risk
This risk relates to the stability of the company in which you are invested and the company’s potential for success or failure. This risk can be minimized by investing in mutual funds in order to invest in multiple companies.

Rate Risk
This risk is more related to investments in bonds and certificates of deposit. If rates of return rise after you have tied up your money for a period of years, you will be committed to lower return on your money. This risk can be minimized by not investing in long-term bonds or certificates of deposit when there is significant potential for rates to rise.

Inflation Risk
This is the risk that your investment will not keep pace with the rising cost of goods and services due to inflation. Over the past 40 years the only investment category that has been able to produce a return that has kept pace with or exceeded inflation in the long-term has been equity investment.

 
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