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How to Choose Investment Opportunities

Updated on August 10, 2013

Many of us worry and wonder where is the best place to invest our money or safeguard our investments. Understanding several prominent and popular investment opportunities will remove some of the doubt and make the choice easier.

STOCKS

Start with the basics. Arguably, the most basic and popular forms of investment options are COMMON STOCKS, which make it possible for an investor to own a piece of a company, becoming a partner, so to speak. Buying shares and investing in a company offer an opportunity to outpace inflation and increase the value of your investment based on a company's performance. Some stocks will pay dividends if a company's earnings are consistent and profitable. However, like many investment options, there are risks and rewards. The risk is you may lose money if a company underperforms. You might sustain a loss even if a company does well because of stock market fluctuations. In terms of the tax implications, be aware that owning a stock for more than a year will allow you to realize the best tax benefit on investments.

BONDS

Be familiar with three types of BONDS: GOVERNMENT BONDS, MUNICIPAL BONDS and CORPORATE BONDS. GOVERNMENT BONDS are the safest investment since they are backed by the Federal Government, but they usually pay a lower interest rate, which is subject to Federal Tax. MUNICIPAL BONDS are relatively safe since they are backed by State Municipalities. However, they usually pay the lowest interest rate, but are Federally Tax free. If you crunch the numbers, you may realize a greater financial gain with this option, depending on your tax situation and other investments. CORPORATE BONDS are backed by a Corporation or Company and usually pay the highest interest rate of the three options, but are the riskiest of the three depending on the financial health of the Corporation/Company.


MUTUAL FUNDS

You might want to consider MUTUAL FUNDS. There are many kinds of MUTUAL FUNDS, involving STOCKS, BONDS AND COMMODITIES. With MUTUAL FUNDS, you're hiring an individual or a team of analysts to manage your assets in place of doing it yourself. The advantage of MUTUAL FUNDS is the history of performance, meaning they have a proven track record. The disadvantage is they are not very transparent, meaning you don't always know what you own and they are not always tax efficient. That means you may have to pay taxes based on the buying and selling done inside the fund, even though you still own the funds. They can also be more expensive than doing it on your own

EXCHANGE TRADED FUNDS

You should be aware of a fairly new investment option gaining in popularity. EXCHANGE TRADED FUNDS are relatively inexpensive compared to MUTUAL FUNDS. They can be traded during the course of the day with full transparency, meaning an investor knows exactly what he or she owns, unlike MUTUAL FUNDS. Also, an investor can participate in the performance of alternative assets, such as gold and oil. EXCHANGE TRADED FUNDS are more tax efficient than MUTUAL FUNDS. However, the risk factors in investing in them are they are passive, meaning they usually follow an Index or Sector of stocks and are not actively managed. Sometimes, EXCHANGE TRADED FUNDS don't perform in line with their Index, dollar for dollar.

OPTIONS

Approach with caution. OPTIONS are much more complicated than STOCKS or BONDS and the average investor must research them thoroughly in order to make an educated decision before investing. The advantage of OPTIONS is there can be a huge upside potential if the investor is right. Also, investors can leverage their money, meaning they don't have to put up as much money to participate as they would buying the stock itself. OPTIONS can also be used to hedge or protect against a drop in their portfolios. However, OPTIONS can be very speculative and an investor could lose his/her entire investment in a short period of time if they make the wrong call. It would be advisable to seek the guidance of a Financial Advisor if you have had no experience in this type of trading.


ANNUITIES

Consider ANNUITIES, a form of insurance that provides a variety of guarantees for your money while living and at death. The two main types of investing are TAX DEFERRED and INCOME ANNUITIES. Each type of annuity works differently and offers a unique set of advantages and disadvantages. The advantage of DEFERRED ANNUITIES is that the interest and earnings are tax deferred. INCOME ANNUITIES provide an immediate guaranteed stream of income in retirement in exchange for a lump sum of money. A TAX DEFERRED ANNUITY can be converted to an INCOME ANNUITY in retirement. Both ANNUITIES come in either fixed or variable. A fixed ANNUITY means you have a specific rate of return for a specific period of time, while variable means you have the option of investing in a mutual fund type investment. The downside is, because of the insurance component, they can be expensive and you cannot withdraw your money before age 591/2 without penalties and taxes similar to a 401K. Another disadvantage is that you're investing with only one insurance company and are limited in your investment options.

CURRENCY TRADING/COMMODITIES

Use caution and know what your doing before investing in CURRENCIES or COMMODITIES. Very complicated, volatile and not for the average investor unless using a MUTUAL FUND or EXCANGE TRADED FUND. Similar to OPTIONS TRADING, where the rewards are high, but the risks are equally high and an investor can be extremely leveraged and not able to access his/her funds. As with OPTION TRADING, it would be wise to seek the guidance of a Financial Advisor if you have not had considerable experience in these investment options.

CONCLUSION

  • Do your homework and make intelligent decisions based on your research before investing.
  • Whatever your choice of Investment Options, don't go it alone. Seek the advice of a professional. People smarter and more knowledgeable than you have lost a lot of money thinking they could do better on their own.
  • The investment opportunities and explanations offered here are basic and are meant only as a guide.


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