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Investments Who wants to be a millionaire? What kind of an investor are you? Rate all investment options according to three characteristics: Safety - Relative risk of losing money Rate of return - percentage earned on your investment Liquidity - ability to turn asset into cash Savings Options Passbook or Statement Savings Account Regular savings account at a bank or credit union Money is easily accessible. Guaranteed up to $100K by the Federal Government Trade - off is that interest rates earned is low (1 to 1 1/2%) Money Market Deposit Account Savings account that pays a higher interest rate, gives limited access to money in the form of checks, but requires the saver to maintain a minimum balance. Also protected up to $100K Certificates of Deposit Time deposits - seven days to eight years or more. Severe penalties for early withdrawal. Also protected up to $100K Government Securities Savings Bonds are issued by the Federal Government as a way of borrowing money. Purchased at 1/2 of face value. Earns a fixed rate of interest until mature. Attractive to those with limited amounts of money to invest. Also, earnings are tax exempt until the savings bond is redeemed. Treasury Bills Certificates issued by the U.S. Treasury in exchange for a minimum amount of $1,000 (in $1,000 increments) and maturing in 3 months to a year. Treasury Notes Same as T-Bills except they take 1 - 10 years to mature. Treasury Bonds Same, but with a maturity date of 10 years or more. Other Government Securities Tax-Exempt bonds, State Bonds, Local Bonds Corporate Stocks v. Corporate Bonds All corporations issue stock. Corporations are not required to Stock represents ownership. issue bonds. Do not have a fixed dividend Bonds represent debt. rate (except preferred stocks). Bonds pay a fixed rate of Dividends are paid only if the interest. corporation makes a profit, and Interest on bonds must always only then at the discretion of the be paid, whether or not the board of directors. corporation earns a profit. Do not have a maturity date. Bonds have a maturity date. The Shareholders are not repaid by bondholder is repaid the value of the corp. the bond. Stockholders have a voice in the Bondholders have not voice or company by electing the board control in how the company is of directors (except preferred run. stockholders). Bondholders have a claim Shareholders have a claim against the property and income against the property and of a corp. that must be met income of a company, but only before the claims of any after claims of creditors have stockholders (including been met. preferred stock). Mutual Funds Pools the money of many individuals to buy stocks, bonds, or other investments. Advantages Professional investment manager. Diversifies investments resulting in lower risk. Disadvantages Management fees. Less control of how your money is invested. Diversification may yield lower returns than buying individual stocks, stocks, bonds, etc. Mutual Funds, Cont’d Indexed Stock Market Mutual Funds Can minimize management fees by buying into a stock market mutual fund pegged to a stock market index. The mutual Fund mirrors a fixed list / index of stocks such as the Standard and Poors 500. No need for a manager as changes to the fund occur automatically as the index changes. Lower management fees. You earn “market” returns. Bond Market Mutual Funds Money Market Funds Mutual fund that uses investors’ money to make short-term loans to businesses and banks Can write checks, but only above a minimum amount such as $500. Not insured like Money Market deposit accounts. Other Investments Individual Pension Plans Individual Retirement Account (IRA) Private retirement plan allows you to save up to $3,000, deduct that amount from taxable income, and not pay taxes on interest earned until withdrawn after 59 1/2. Roth IRA - Do not deduct contributions from taxes, but interest earned is tax free. Commodities - Gold, Oil, Pork Bellies, Cocoa, Etc. Real Estate, Coins, Art, Antiques, Beannie Babies, anything that you believe will grow in value over time.
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