It is a great idea to have money in savings that is readily accessible for emergencies, such as if you lose your job or when the washing machine dies. While cash in a bank savings account is safe and available, it doesn't earn much interest. Stocks and bonds can provide a much better rate of return. You can learn to pick good stocks and bonds, but it takes time and patience, and there are no guarantees. Even good companies can lose money.
Determine Your Investment Goals and Temperament
Good is a relative term, particularly with you're talking about stocks and bonds. A good stock or bond is one that performs in a way that provides you with the greatest benefit based on your individual needs. Your needs are probably significantly different from your parents' needs or your next door neighbor's needs. You must determine your investment goals and temperament before you can pick a stock or bond. Your investment goals might range from long-term growth to a steady stream of current tax-free income. Your investment temperament might range from ultra-conservative to roll-the-dice. It doesn't really matter what your goals and temperament are, as long as you know what they are.
Understand the Product
Never buy an investment product that you do not understand. It is a recipe for financial disaster. There is a basic difference between stocks and bonds. Stocks represent ownership in a corporation. Bonds represent a loan to the corporation, municipality or governmental organization. Some stock investments provide a steady stream of income through dividend payments. Bonds can provide a steady stream of income through interest payments. Both stocks and bonds trade on the open market, providing the opportunity for either capital gains or capital losses.
Rating the Product
Not all stocks and bonds are created equal. Bonds are rated for safety by independent rating companies, such as Moody's or Standard and Poor's. The top four ratings of each ratings company indicate investment-quality bonds. Bonds that are rated below are considered non-investment grade and are sometimes referred to as junk bonds. Junk bonds tend to pay significantly higher interest rates than investment-quality bonds, but they also carry a higher risk of default. Companies are also rated by a number of investment services, including most major investment brokerage houses. If you are not an expert at reading a company's financial statement, information from these research and ratings organizations can provide valuable insight into the stock or bond's prospects.
Learn From Your Mistakes
You might make money by picking good stocks and bonds, but chances are that at some point you will make a bad investment decision and lose money. That's where the concept of diversification comes in. It's like what your grandmother always told you: Don't put all your eggs in one basket. When you lose money on a stock or bond trade, take the time to examine the situation to determine why. This will help you make a better trade next time.
- Securities and Exchange Commission: Get the Facts: The SEC's Roadmap to Saving and Investing
- Securities and Exchange Commission: Ask Questions
- Securities and Exchange Commission: Beginners' Guide to Financial Statements
- New York Stock Exchange: Stocks
- Securities Industry and Financial Markets Association: What Are Bonds?
- Standard and Poor's: Browse Ratings by Practice
- Department of Labor: Savings Fitness
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