Types of Investments

Stocks are ownership shares in a corporation. When you buy stock you become one of the corporation's owners. If the company does well, they may declare a dividend and the price of the stock may also increase. But if the company does not do well, the value of the stock may decrease and you may lose money.

The value of a given stock depends on whether the shareholders want to hold or sell the stock and on what other investors are willing to pay for it. Investors make their decisions based on whether or not they believe they can make money with the stock, the current market conditions and the overall state of the economy. Money is made through dividend payments while the stock is owned and, by selling the stock for more than its cost.

Bonds

Bonds are loans investors make to corporations and governments. "The amount you lend is called the principal and is paid back to you on the maturity date, which can range from 60 days to 30 years later. The longer the maturity the higher the amount of interest that is paid to you. In the meantime, the borrower agrees to pay you interest every 6 months for the use of your money. The interest rate, which is also called the coupon rate, is fixed; it will not change for the life of the bond. For example, if you invest $10,000 in a U.S. Government Bond that pays a 10% coupon rate, which will mature in 5 years, you will receive $500 every 6 months until the bond matures, a total of $5,000. At maturity you will also receive your $10,000 original principal" says Cherly D. Broussard, The Black Woman's Guide to Financial Independence, page 108.

If you decide to sell your bond before the maturity date, you may lose money if interest rates and inflation increases, because the value of the bond will decrease. You may make money if interest rates and inflation decreases, because the value of the bond will increase. For more information on Bonds, go to the web sites of Moody's Investors Service and the U.S. Government Bureau of the Public Debt.

Mutual Funds

A Mutual Fund is an investment company with a professional manager who pools money from a group of investors to purchase a collection of stocks, bonds or other securities or a different combination of these vehicles.

The main advantage of investing in a mutual fund over individual stocks is diversification. Because a fund makes many investments, if some decline in value, the others are apt to do well, minimizing lose, if any.

Before investing in a mutual fund, you should request a Prospectus. It includes a statement of objectives, a description of how the fund operates which includes fees charged, a summary of its investments and information about its management. There are some funds that require very little initial investment if you agree to make a minimum monthly investment through automatic bank transfers or direct deposits. For more information on Mutual Fund Companies, go to the web site Labpuppy.com.

Money is made by earning dividends or interest on its investments and by selling investments that have increased in price. Its profits are distributed to its investors minus fees and expenses. Mutual funds are long-term investments. The value of its shares increases over a period of time.

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