Investing isn’t just a luxury of the rich anymore, but a necessity of the working class. The financial buffers that are there for our parents may not be there for us and investing money is the only way to naturally create a steady increase in existing money over time.
When most people think of investing, they think about the stock market. You purchase shares and stock in various companies and as the company grows, the value of your stocks and shares grow as well. It can also decrease in value if the company doesn’t perform well.
The good news is that stocks and shares ISAs are individual savings accounts that allow you to put money into stocks and shares and any interest made is tax-free.
Stocks and shares provide for the greatest opportunity of growth and loss over time. Investment opportunities include unit trusts, open-ended investment companies (OEICs), exchange traded funds, investment trusts and individual shares and bonds. This is why a diverse portfolio is a necessity. It helps shore up your finances as certain stocks go up and others decrease.
There are two primary types of stocks. Common stocks are simply equity in the ownership of a company. Your return comes from dividend income and capital gains. Common bonds provide the best long-term return potential.
Preferred stocks are not a debt, but have characteristics of common stocks and bonds. They also carry the biggest risk. Types of preferred stock include blue chip, penny, income, growth and value stocks. Dividends are generally a fixed percentage of the face value and can be affected by interest rates changes. Also, dividends are not a contractual obligation and can be skipped if earnings are low.
Risk is negligible in a cash individual savings account compared to stocks and shares ISAs, but it also has a comparatively low interest rate. These act just like standard savings accounts, but the interest accrued is tax-free. There is a limit to the amount of money you can put into a cash ISA. You can only open one account per tax year.
There are two keys to making a cash ISA work for you. The first is you need to research the various banks to see which ones have the best interest rates. The other key is to start making payments into the accounts as soon as possible. The earlier you begin making regular payments into the savings account, the more time the interest has to accrue.
A bond is a form of debt where you are providing a portion of the loan. There are many different types of bonds including business, municipal, state and federal, but their purpose is the same.
The agency taking out the bond agrees to pay you, the investor, the money back plus a set interest. The likelihood of a city, state or federal agency defaulting on a bond is negligible. A private company may end up going bankrupt or be unable to make its payments and is a greater risk. The caveat is that the bigger the risk, the bigger the return.
Once again, diversification is the best way to make sure your bond investments work for you. A good mix of stable bonds and more risky bonds help to guarantee a steadier stream of regular income. When it comes to bonds versus stocks, short-term investors will probably see a greater return on the bonds, but if you plan on investing for 15 years or more, stocks tend to provide the better return.