You often hear stories of someone investing in the stock market and making millions of dollars or about Uncle Joe who invested and lost every penny to his name. Through school you may have been told that you should invest, but where do you start? What should you invest in? Will I lose all my money if I make the wrong choice? These are all valid questions and concerns that you should have before you invest your money.
So what should you invest in? There are several different types of investments out there, each with a varying degree of risk and reward. One of the safest investments you can make is putting your cash in the bank. Most of us do this already and you may notice that your bank pays you a little interest every once in a while. You may have seen them pay you 25 cents or something like that on your bank statement. 25 cents can’t even get you a candy bar these days, but banks might be a bit better than keeping your cash under a mattress.
This is where risk and reward come in. In order to make more than a few cents on your money, you are going to have to sacrifice something else. You could get a certificate of deposit from your bank otherwise known as CD’s. This is putting a specific amount in your account and letting the bank use it for a specific amount of time. Usually one to five years. The bank will give you a higher interest rate for it but you won’t be allowed to take out the money for as long as the CD is for without penalties and fees.
So the two percent you get from the CD is still not enough for you so what do you do? The next step up in risk is Bonds. When a company needs to raise money, one option for them is to issue bonds. It is a little like the company or organization is taking out a loan from lots of different people and are paying interest back to you. So when you buy a bond, the organization that issued the bond will pay you interest like you would pay the bank interest for a loan. This can be a bit riskier depending on what the organization is. It can be from the government which is safer, or from a corporation which is riskier.
If you want the potential for even larger returns you can choose to invest in stocks. A stock is a part of a company so when you buy a stock you are actually buying a part of a company. If the company does well the stock will be worth more and you can sell it for more than you bought it, but if the company does poorly then the stock may be worth less money than when you bought it. Some stocks will also pay dividends. A dividend is when a company does well and can pay the owners. You are a part owner so you get to share in a small percentage of the profits.
There are many other ways that one may invest their money. The important thing to remember is to do your research. Each situation is different and you want to put your money into something that you understand. Investing isn’t a get rich quick scheme but it is a wealth building strategy. A strategy that works.