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Personal Finance:
Understanding the Investment Instruments
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document, Understanding the
Investment Instruments
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Copyright © 2017 Pearson Education, Inc.
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Personal Finance
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Introduction
Will you have enough money to retire when you are ready to quit your job, kick back, and enjoy your life?
What is considered enough? Unfortunately, many people will not be able to do so. Therefore, you need to
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learn how budget your document
income and
expenses;
to manage your money wisely; to invest your savings
beginning
with
prudently; and to ensure Personal
that you have
enough
money
Finance
to the
end. for your retirement. It is never too early to plan for
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your retirement. Because of the compounding effect, the earlier you plan, the better off you are.
The best time to prepare for your retirement is NOW. Money do not grow on trees –
you need to save your money FIRST before they can grow and multiply for you. You
can get started by putting aside a few dollars a week into a piggy bank, and then deposit
the accumulation into an individual retirement account (IRA) account at your local bank
or any online investment companies such as TD Ameritrade or Scottrade.
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This research paper describes
the various types of investment options that you can pick to invest in your
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IRA account. You need
to determine
what Blue,
kind of
risk2,level
you are willing to take in return for the rate
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of return on your investment.
Generally
speaking,
the higher
the rate of return, the higher is the risk. Do
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to the paragraph
in the
your homework – there
are many
valuable
financial resources
available on the Internet. You may visit
Introduction section that begins with The best
Web sites such as CNN Money, Kiplinger, The Motley Fool, and Suzy Orman. Depending on the services
time to prepare for your retirement
offered by these Web sites, you can opt to receive weekly e-mail savings or investment tips, or listen to
weekly/monthly podcast series. Some of the investment instruments that you can consider are:
 Equity stocks
 Corporate bonds
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 Long-term government bonds
six paragraphs in the
Introduction section
 U.S. Treasury bills
 Mutual funds
 Fixed deposits
In the following subsection, you will learn more about each of these instruments. Read and understand
how each of these investment works, and then evaluate their pros and cons,
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Equity Stocks
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The major stock market in the country is the New York Stock Exchange (NYSE), the American Stock
Exchange (ASE), and the National Association of Securities Dealers Automate Quotation System
(NASDAQ). The overall performance of the stock market is evaluated in various ways. For instance, the
Dow Jones Industrial Average (DJIA) is a composite of 30 stocks with a daily average. If the market
trends move up, it is called a bull market. On the other hand, if the market trends move down, it is called
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a bull market.
Individual
stocks
and real estate are considered high-risk investments. However,
Warren
Buffet in
the Equity
traditionally,Section
stocks had
in fact
offeredwith
an average
rate of return between 7 to 10% annually. But that is
to two
columns,
a
never a guarantee.
Warren them
Buffet has several quotes about investing in the stock market.
line between
“Risk comes from not knowing what you’re
doing.”
“I never attempt to make money on the stock
market. I buy on the assumption that they could
close the market the next day and not reopen it
for five years.”
“Only buy something that you’d be perfectly
happy to hold if the market shut down for 10
years.”
Source: Quotes by Warren Buffet
Bonds
In the
Bonds
section,
the a
If you want something a little less risky than stocks, you can consider
buying
bonds.
Whenapply
you buy
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to below:
the three
bond, you are lending money to the buyer. There are several types of numbered
bonds and they
are listed
bonds listed
1. Corporate bonds – these bonds are sold by business corporations, and they traditionally pay a little
more interest than the government bonds.
2. Long-term government bonds – these bonds are backed by the government; therefore, they are
considered relatively safe.
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3. Municipal bonds – these bonds are issued by the state, local, county, local hospitals, or colleges,
instead of the federal government. One of the advantages of municipal bonds is that the interest
payments is not subjected to federal income taxes.
.
Mutual Funds
A mutual fund is a financial investment that is managed by a team of professionals, and the investors have
to pay a varying managing fee/expense. Generally speaking, a mutual fund can be described as a collection
of various investment vehicles that are regulated and sold to the general public Mutual funds typically
offer mid-level risks to investors, and examples of mutual funds include money mutual funds and stock
mutual funds.
U.S. Treasury Bills
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government in the U.S.
Treasury Bills section
U.S. Treasury bills and government securities are low-risk investments. They usually mature in a year or
less. They function as a zero-coupon bonds; that means they do not pay interest prior to their maturity, but
they are sold at a discount of the par value so that they can create a positive yield to maturity. Because
they are guaranteed by the U.S. government, this financial instrument has very low risk.
Fixed Deposits
A fixed deposit is a financial instrument provided by a bank and guaranteed by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000 per account. Because of this guarantee, the rate of return
from a FD is relatively low. Be aware that FDIC does not provide guarantee to credit unions.
What does Warren Buffet have to say about people who put their money in the bank?
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“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible
long-term asset, one that pays virtually nothing and is certain to depreciate in value.”
Source: Quotes by Warren Buffet
Conclusion
How should you invest your money? There is no right or wrong answer. How you invest depends on the
risk level that you are willing to accept. The choices range from the higher rate or return but more risky
equity stocks to the low, but guaranteed rate of return offered by the US government. If you want to able
to sleep at night, perhaps you should stick with the very conservative fixed deposits. Besides making smart
investments, don’t forget to put money aside for any unexpected emergencies and establish a healthy credit
rating.
Sources
Move the Sources section to
CNN Money. http://money.cnn.com
below the Conclusion section in
Kiplinger. http://www.kiplinger.com
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The Motley Fool. http://www.fool.com
view
Suze Orman. http://www.suzeorman.com
Quotes by Warren Buffet. http://www.brainyquote.com/quotes/authors/w/warren_buffett_3.html
Copyright © 2017 Pearson Education, Inc.