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This month, Young Americans Bank introduces you to nine common tools people use for investing. What is investing? You can think of it as spending money to make money. The goal of investing is to buy something now that will be worth more in the future!
When you invest money, you are taking a risk. Sometimes an investment makes money, and sometimes it does not. And sometimes, you might even lose money in an investment.
Read through each of the descriptions below, then think about whether the investment tool is a high-risk, medium-risk, or low-risk investment using this Risk Pyramid. After you’re finished, stop by Young Americans Bank to see how you did!
A bond is an IOU. By buying bonds, the bondholder lends money to a company or a government. In return, the borrower promises to repay the amount borrowed with interest. Corporate bonds are issued by public companies, while municipal bonds are issued by state or local governments. If the business fails, bondholders are paid back before stockholders, so bonds have less risk than stocks. Bonds vary as to risk and return, but in general, bonds offer medium risk.
Certificates of Deposit
Often referred to as CDs, these investments are purchased for a specific amount of money at a fixed rate of interest for a fixed amount of time. CDs may be purchased for as little as seven days or as long as five to ten years. The longer the time, the higher the return.
Collectibles could include antiques, art, baseball cards, dolls, stamps, precious metals or gems. The investment is not very liquid because collectibles become more valuable the longer the investor holds onto them, and then the investor must find a buyer. The risk on collectibles is high.
A futures contract is a deal made today to take place in the future. Futures con-tracts deal in commodities, which are products such as corn, soybeans, wheat, cattle, gold, crude oil, and foreign currencies. The investor contracts to buy or sell a commodity at a future date, guessing on the value of the commodity on that future date.
Government Obligations are like bonds – an IOU certifying that you loaned money to the U.S. government. Examples of government obligations include Treasury bonds, bills, notes and savings bonds. The government promises to repay the investor with some return. Even if the U.S. government goes bankrupt, it is obligated to repay.
A mutual fund is a professionally managed portfolio made up of stocks, bonds, and other investments. A fund manager buys and sells securities for the fund’s shareholders. Because a mutual fund includes many different securities, the risk is lower than investing in stocks and bonds that depend on the success of one company or government unit. If some securities in the fund do poorly, others may perform well. In general, mutual funds offer moderate risk and return, although some funds offer higher risk than others.
Buying a home or property is an investment. Over time the real estate may go up in value. Ownership of rental properties and commercial buildings requires time and skill. The investment is not very liquid because the investor must first find a buyer. In general, real estate is considered a moderate risk.
Accounts offered by banks, credit unions, and savings and loan associations provide easy access to funds and pay interest. Savings accounts offer the most liquid type of investment, with low risk, and therefore, low interest. If placed in an institution insured by FDIC, money deposited is safe up to $100,000.
Stock represents ownership of a corporation. Stockholders (shareholders) own a share of the company and are entitled to a share of the profits as well as a vote in how the company is run. Company profits may be divided among shareholders in the form of dividends, which are usually paid quarterly. If the company does well, the value of the stock should increase over time. However, if the company does poorly, the value of the stock will go down.