The Role Of Stocks And Bonds In Investments
Do The Following To Begin To Achieve A Serene Foundation:
1. Don't be afraid to invest in the stock market, so include stocks and bonds in your investment portfolio.
2. Use fundamental analysis to assess a company's basic value before investing in any stock or bond.
3. Resist from putting money into so-called hot investments.
4. Invest part of your portfolio in TIPS (Treasury Inflation-Protected Securities), that beat inflation.
5. If you have children, consider using zero-coupon bonds (in addition to Roth IRAs) to help save for their education.
Corporations may issue three types of securities (negotiable instruments of ownership or debt) to raise capital and fund their goals: common stock, preferred stock, and bonds.
Stocks are ownership shares of a company corporation's assets and profits. Each shareholder is a part-owner of a company.
Common stock is the most basic form of ownership of a corporation. For the investor, stocks represent potential income because they own a piece of the company's future profits. Common stock investors typically have the expectations: (1) the company will be profitable enough for profits to surpass the expenses and allow the company to pay cash dividends; and (2) the market price of a share of stock will rise over time. Investors expect average annual returns of 7% or higher over time from the combination of dividends and capital gains.
Preferred stock is a type of fixed income ownership security in a corporation. Owners of preferred stock receive a fixed dividend per share that corporations are required to distribute before any dividends are paid out to common stockholders. They also rarely earn any additional revenue from the stock other than their fixed dividend, even if the business is highly profitable. The regular dividend payments appeal to those who desire a consistent stream of income, such as retired investors. While the income stream may be reliable, preferred stock's market price is sensitive to interest rate changes.
Individuals who want to invest by loaning their money can do so by purchasing bonds and becoming a business creditor. A bond is an interest-bearing negotiable debt certificate issued by a corporation, the U.S. government, or a municipality (such as a city or state). In theory, bonds are IOUs. Corporations and governments often use the proceeds from bonds to finance costly construction projects and purchase expensive equipment. For bonds, investors lend the issuer a certain amount of money, the principal, with two expectations: (1) they receive monthly interest payments at a fixed rate of return, and (2) they get their principal returned in the future on a particular day called the maturity date. Suppose a bondholder wants to sell before the maturity date. In that case, they must understand that the bond's market price is vulnerable to changes in interest rates.
By investing early and regularly, you benefit from some of the most incredible compounding power in the asset's value.
Example: The monthly investment of $50 and 8% return grows to $29,400 in 20 years, $74,000 in 30 years, and $174,000 in 40 years.