The investments you choose should match your interests. Before investing, think about lending versus owning, short term versus long term, and how to select investments that are likely to provide your desired potential total return.
Do You Want to Lend or Own?
You can invest money in two ways, by lending or by owning. When you lend your money, you receive some form of IOU and the promise of repayment plus interest. The interest is a form of current income while you hold the investment. Lending investments rarely result in capital gains. You can lend by depositing money in banks, credit unions, and savings and loan associations (via savings accounts and certificates of deposit) or by lending money to governments (via Treasury notes and bonds as well as state and local bonds), businesses (corporate bonds), mortgage-backed bonds (such as Ginnie Maes), and life insurance companies (annuities). Such lending investments, or debts, generally offer both a fixed maturity and a fixed income. With a fixed maturity, the borrower agrees to repay the principal to the investor on a specific date. With a fixed income, the borrower agrees to pay the investor a specific rate of return for use of the principal. Such investments allow lenders to be fairly confident that they will receive a certain amount of interest income for a specified period of time and that the borrowed funds will eventually be returned. Thus, the return is somewhat assured. No matter how much profit the borrower makes with your funds, the investing lender receives only the fixed return promised at the time of the initial investment.
Alternatively, you may invest money through ownership of an asset. Ownership investments are often called equities. You can buy common or preferred corporate stock (to obtain part ownership in a corporation) in publicly owned companies, purchase shares in a mutual fund company (which invests your funds in corporate stocks and bonds), put money into your own business, purchase real estate, buy commodity futures (pork bellies or oranges), or buy investment-quality collectibles (such as rare antiques or stamps). Ownership investments have the potential for providing current income; however, the emphasis is usually upon achieving substantial capital gains.
Making Short-, Intermediate-, and Long-Term Investments
If you are investing for a short-term time horizon of less than a year or an intermediate-term of perhaps up to five years, you want to be confident that you preserve the value of what you have. After all, you don’t want to lose money in an investmentwhen you need to use that money for a near-term goal, such as college tuition, or be forced to sell an investment because you need cash in a hurry. People with a short or intermediate time horizon require investments that offer some predictability and stability. As a result, these investors are usually more interested in current income than capital gains. If you are investing to achieve long-term goals, by contrast, you want your money to grow, and, therefore, you are likely to keep your money in the same investments for 10 or 15 years. Long-term investors usually invite more risk by seeking capital gains as well as current income. Table 13.1 provides an overview of investment alternatives.
Choose Investments for Their Components of Total Return
When investing, you want to select a portfolio of investments that will provide the necessary potential total return through current income and capital gains in the proportions that you desire. One stock might provide an anticipated cash dividend of.
Do You Want to Lend or Own?
You can invest money in two ways, by lending or by owning. When you lend your money, you receive some form of IOU and the promise of repayment plus interest. The interest is a form of current income while you hold the investment. Lending investments rarely result in capital gains. You can lend by depositing money in banks, credit unions, and savings and loan associations (via savings accounts and certificates of deposit) or by lending money to governments (via Treasury notes and bonds as well as state and local bonds), businesses (corporate bonds), mortgage-backed bonds (such as Ginnie Maes), and life insurance companies (annuities). Such lending investments, or debts, generally offer both a fixed maturity and a fixed income. With a fixed maturity, the borrower agrees to repay the principal to the investor on a specific date. With a fixed income, the borrower agrees to pay the investor a specific rate of return for use of the principal. Such investments allow lenders to be fairly confident that they will receive a certain amount of interest income for a specified period of time and that the borrowed funds will eventually be returned. Thus, the return is somewhat assured. No matter how much profit the borrower makes with your funds, the investing lender receives only the fixed return promised at the time of the initial investment.
Alternatively, you may invest money through ownership of an asset. Ownership investments are often called equities. You can buy common or preferred corporate stock (to obtain part ownership in a corporation) in publicly owned companies, purchase shares in a mutual fund company (which invests your funds in corporate stocks and bonds), put money into your own business, purchase real estate, buy commodity futures (pork bellies or oranges), or buy investment-quality collectibles (such as rare antiques or stamps). Ownership investments have the potential for providing current income; however, the emphasis is usually upon achieving substantial capital gains.
Making Short-, Intermediate-, and Long-Term Investments
If you are investing for a short-term time horizon of less than a year or an intermediate-term of perhaps up to five years, you want to be confident that you preserve the value of what you have. After all, you don’t want to lose money in an investmentwhen you need to use that money for a near-term goal, such as college tuition, or be forced to sell an investment because you need cash in a hurry. People with a short or intermediate time horizon require investments that offer some predictability and stability. As a result, these investors are usually more interested in current income than capital gains. If you are investing to achieve long-term goals, by contrast, you want your money to grow, and, therefore, you are likely to keep your money in the same investments for 10 or 15 years. Long-term investors usually invite more risk by seeking capital gains as well as current income. Table 13.1 provides an overview of investment alternatives.
Choose Investments for Their Components of Total Return
When investing, you want to select a portfolio of investments that will provide the necessary potential total return through current income and capital gains in the proportions that you desire. One stock might provide an anticipated cash dividend of.
1.5 percent and an expected annual price appreciation of 10 percent, for a total anticipated return of 11.5 percent. Another choice offering the same projected total return might be a stock with expected annual cash dividends of 3.5 percent and capital gains of 8 percent.
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