Stocks, bonds, bank accounts or IRAs? How do you choose?
With several types of investments to choose from and also thousands of sub-categories under them, finding the most suitable investment choice can be a daunting task.
First off, the main consideration in any long-term investing decision is the rate of return expected from it. At times though, investing in short-term investment can enhance your wealth even if the returns are not as high as you want them to be. You can select from among these common short-term savings vehicles:
Short-term savings vehicles
Bank savings account: The most resorted to savings medium availed of by people, which provides small returns but better than keeping your money at home where it could be stolen or spent easily.
Our company is partial to stocks as investment vehicles over the rest of the long-term choices since stocks have statistically provided the best rate of return in an investment. The most common long-term investing vehicles are as follows:
Long-term investing vehicles
Bonds: There are various forms of bonds. Also known as "fixed-income" securities, bonds generate a “fixed” or set income value each year when it is sold.
Stocks: Stocks allow an individual to own a portion of a company or business. A single stock share represents an investor’s proportional stake or share of ownership in a business.
Mutual funds: Mutual funds are vehicles which allow investors to combine their money to buy bonds, stocks, or any vehicle the fund manager considers viable.
Several special plans are intended to build retirement savings; and many of these plans permit an individual to transfer money directly from his or her paycheck prior to taxes. In support for this plan, companies sometimes match the amount transferred, or even a small portion of that amount, as their goodwill contribution to their employees’ future.
Individual retirement account (IRA): This type of plan lets you invest some money into a tax-deferred retirement fund – which means you will not be taxed unless withdrawals are made or before the fund matures.
Roth IRA: Unlike the previous IRA plan, this type of retirement account requires no tax payments up-front on contribution. Rather, it provides full exclusion from federal taxes when cash is withdrawn to purchase a first home or pay for retirement.
401(k): Employers provide this retirement savings vehicle, whose name is taken from the section of the Internal Revenue Code which allows it.
403(b): This is the nonprofit version of a 401(k) plan. Local and state governments also provide a 457 plan.
Keogh: A specialized form of IRA that serves simultaneously as a pension plan for a self-employed individual, who has the capacity to pay substantially higher contributions permitted for an IRA.
Simplified Employee Pension (SEP) plan: This is a special type of Keogh-individual retirement plan designed to allow small businesses to provide retirement plans (for their employees) that are slightly easier to manage compared to conventional pension plans. Either the employer or the employees can participate in a SEP.
Stocks deserve a closer look as they have been known in the past to offer higher returns compared to bonds and other vehicles. As mentioned, the investor becomes a part-owner of a company.
The most common type of stock is, as expected, the common stock. The common stock provides an ideal vehicle for most individuals, since anyone can participate – whether you are young, old, discriminating or easy-go-lucky. There is practically no restriction imposed against anyone who wants to buy a common stock.
Different types of stock
Sometimes, companies can opt to focus the voting privilege of a company to cover only a particular type of stock, limiting the majority of shares to only a select group of investors. As an example, a family business seeking to raise capital by selling equity might create a second type of a stock which they already control and has, for instance, 10 votes for each share, while they release to others another type of stock that allows only a single vote per share.
What happens from now on?
That is about all you need to know for now about the fundamental classes of investment options available to you. You can start impressing some of your friends and relatives about your newfound knowledge on stocks. Use the basic terminology as well as the essential principles of becoming a shareholder of a company to tell them how they can also join in the experience of investing. Most of all, tell them of the potential rewards you and they can expect from buying stocks while reminding them of the greater risks they will encounter compared to merely keeping their money in a bank. In the end, what you will decide to do with your new knowledge will be up to you.