The world of finance is not some distant planet in a far-away galaxy. It is part of our daily lives. From the paycheck you earn to the money you spend and the money that you hopefully save and invest for your future is all part of the world of finance.
Trying to explain the ups and downs of the stock market the ever-present “adjustments” when the market acts in an unusual way and trying to understand exactly how it works takes a long time to learn. However, there are the basic things to know that may help you with manage your money and with a little patience see a good return on your investment.
There are many investment options. There are also many variables that need to be understood. Here is a list of 10 terms and a basic definition that might help in understanding the financial world that co-exists with our daily lives of making a living, paying the bills, feeding the family and planning for the future.
- Bonds: Investment instruments sold by the Government and Private enterprise. The purchasers buy for a set amount for the bond with the understanding that interest will be paid annually on the investment.
- Stocks: These instruments represent ownership in a company. The stocks are purchased at market price and will increase or decrease in value depending how well that company is doing or group of companies is doing. If the company is profitable, then the value of the stocks will increase. If the company loses money, the stock’s value will decrease. Whether you buy or sell will depend on the history of the company and the risk you are willing to take.
- Stock Market: Virtually everyone has heard about the stock market. Normally, you heard about the Dow Jones Averages or the Standard and Poor’s Index and what is happening at the New York Stock Exchange. Stocks are purchased and sold here, but you can buy and sell through a local broker. A broker can become a financial adviser. Just be certain that he is looking out for your best interest and is not constantly urging you to buy or sell so he can earn higher commissions.
- Certificates of Deposits: These are similar to bonds, but are for smaller amounts and are sold by banks and some other institutions. Interest is paid on the money invested in the Certificate of Deposit (CD), and that rate is identified at the time of purchase. The number of years that a CD can be purchased for investment purposes is usually limited to five or less, but there are exceptions.
- IRA: This stands for Individual Retirement Account. These can be handled by a stockbroker or some banks. You are allowed to invest a certain amount of money tax free. The money is supposed to stay in the account until a person is 59 and ½ years old. There are numerous options for making investments. While there are no taxes on the money, you contribute; the earnings are subject to regular income tax.
- Roth IRA: This is very similar to the IRA, with two differences. The money you invest is taxable. However, the earnings are not taxable. There are age limitations as to when you can withdraw the funds.
- Annuities: This is a form of retirement security where the individual invests money and lets the annuity grow in value. Then upon retirement the person can start drawing monthly payments from the annuity. There are several kinds of annuities. Some will only offer monthly payments. Others will allow lump-sum payments. A portion of the interest can be withdrawn at various intervals, leaving the basic investment intact. This can be a good investment form, but it requires a lot of research.
- 401k: This can be a good investment option, particularly, if the employer contributes to it on your behalf. Depending on how the account is organized, the employer may decide where the investments are made. Other companies will allow individual participants to decide how the retirement funds are invested. They can be invested in bonds, which have a guarantee rate of return, which is usually low. Often the employee is allowed to map-out his investment plan.
- Taxes: Retirement benefits are subject to federal and state taxes. Usually, taxes are levied on the benefits resulting from the investments. One exception is the Roth IRA already mentioned. As a person grows older, many of his expenses, such as house payments, raising children and other expenses will cause their tax bracket to change.
- Hedge Funds: This is a complicated and can be viewed to be similar to a football game. In the game, if one side adopts play patterns that the opposing team has never seen, they have to adjust and may find themselves end. Hedge Funds watch various investment opportunities or anticipate possible problems with existing investment and make adjustments that may yield higher returns or result in greater losses.
This is only the surface of the available money markets and the options that are available to investors. Your current financial status, the amount you are willing to invest and the goals you want to meet, will all have to be examined before choosing the investment option that is best for you, your family or your company.