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Financial Investment: How Does It Work?

Financial investments are agreements to lend out your money, by either storing, buying, or loaning, with the assumption that you may see a return sometime in the future. It’s tricky, but it is also a prime means through which the financially stable grow their excess income. It may not always work in your favor, but when it does, it can pay off in a big way. At some point in our lives, we look at what we have and look to the future. Putting away money is great and everyone should save what they have. But once you have a lump sum of expendable money, what better way to use it than to make it grow? Why not take your money and make it work for you? Here are some examples of widely used types of financial investments and how you can use them.

Stocks

A stock is a piece of a company that is offered to the general public. In buying stock, you own a piece of that company–however much you may choose, and become privy to some of the inner workings of how the company operates. People primarily make money off of stocks in two distinct ways: Dividends, and Capital gains. Dividends are a small payout that a company may give to their shareholders when they are profitable. This feature brings many retirees to buy these high-dividend stocks for the purpose of a retirement income. Your other means of making money, capital gains, is the one most popularized by the media. It’s essentially taking advantage of the constant fluctuation in stock price by buying low and selling high. The danger of focusing on capital gains is that if the company goes under for whatever reason, the stock price may very likely go lower than what you paid for, essentially causing you to lose money. If you follow Money Task Force or any other reputable money news website, you can have a general idea of where a region of major corporation is going–up or down. From there you can really see the fluctuations in stock price based on the performance and the events of that particular business sector. The key is to do your research.

Bonds

Bonds are a less popularized financial investment that can yield some amazing gains in the long run. A bond, also known as a debt security, is contractually bound loan that you give to a company in exchange for a return, with interest, in the future. That future date is a maturity date. That’s fixed in the type of bond you buy. It can range anywhere from one day to one-hundred years. There are a whole set of subclasses pertaining to bonds such as treasuries, corporate bonds, municipal bonds, and mutual fund bonds. Bonds have been touted as a more stable form of investment. And although that may be true in some instances, the reality is that they’re just as susceptible to the fluctuations of the market as any other investment. They are a type of fixed-income security because you’re being paid interest based on a fixed rate agreed upon at the time of issue. Also, if you pull your money out early, you face the likely possibility of losing money on that bond.

401(K)

Arguably the most common type of investment plan is the 401(k), named after the section of the tax code in which they are described. A 401(k) plan is a type of salary-deferral investment in which a portion of your pay from a private institution employer is placed in a separate account. In doing so, the taxable income that your employer reports is decreased by the amount that you put in the 401(k). Incentives for investment may include some sort of matching scheme where the companies match a certain percentage of what you put in the account. These plans are generally offered by most large corporations within the United States and are the primary means that the average American plans for retirement.

These are just a few types of financial investment, but the basic idea behind it is that you give money, let it work in the system, and get a return based on the terms you agree on. In this amazing time, the ability to invest has been given to everyone. Gone are the days of intimidating institutions and shady brokers. You have the power of choice and all the knowledge at your fingertips.