Unit 1 the basics of saving and investing
Financial institutions offer a number of different savings options. Investing is buying assets such as stocks, bonds, mutual funds or real estate with the expectation that your investment will make money for you.
Investments usually are selected to achieve long-term goals. Generally speaking, investments can be categorized as income investments or growth investments. Saving , from the Concise Encyclopedia of Economics Saving means different things to different people. To some it means putting money in the bank. To others it means buying stocks or contributing to a pension plan.
But to economists, saving means only one thing—consuming less in the present in order to consume more in the future. The amount of corn on hand at any point in time can either be consumed literally gobbled up or saved. Any corn that is saved is immediately planted invested , yielding more corn in the future.
Hence, saving adds to the stock of corn in the ground, or in economic jargon, the stock of capital. The greater the stock of capital, the greater the amount of future corn, which can, in turn, either be consumed or saved…. Investment , from the Concise Encyclopedia of Economics Although in general parlance investment may connote many types of economic activity, economists normally use the term to describe the purchase of durable goods by households, businesses, and governments.
Private nongovernmental investment is commonly divided into three broad categories: residential investment, which accounts for about a quarter of all private investment Indeed, inventory investment is often negative it was in , and in three years during the eighties. Business fixed investment, in turn, is composed of equipment and nonresidential structures.
Equipment now makes up over three-quarters of business investment…. Understand the power of compounding. Sticking with index funds or exchange-traded funds ETFs that mirror the market is often the best path for a new investor.
Stocks tend to have higher yields than bonds, but also greater risks. Many investment specialists recommend diversifying one's portfolio. Cash A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. On the downside, the interest earned from cash socked away in a savings account seldom beats inflation.
Certificates of deposit CDs are less liquid instruments, but they typically provide higher interest rates than those in savings accounts. However, the money put into a CD is locked up for a period of time months to years , and there are potentially early withdrawal penalties involved. Bonds A bond is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital.
Bonds are commonplace in organizations that use them to finance operations, purchases, or other projects. Bond rates are essentially determined by interest rates. Due to this, they are heavily traded during periods of quantitative easing or when the Federal Reserve —or other central banks—raise interest rates.
Mutual Funds A mutual fund is a type of investment where more than one investor pools their money together to purchase securities. Mutual funds are not necessarily passive , as they are managed by portfolio managers who allocate and distribute the pooled investment into stocks, bonds, and other securities. Even a relatively small investment provides exposure to as many as different stocks contained within a given fund's portfolio.
There are also many mutual funds that are actively managed , meaning that they are updated by portfolio managers who carefully track and adjust their allocations within the fund. Mutual funds are valued at the end of the trading day, and all buy and sell transactions are likewise executed after the market closes.
Many investment specialists advise their clients to diversity into a wide range of securities rather than focusing on just a few stocks. ETFs are similar to mutual funds, but they trade throughout the day, on a stock exchange.
In this way, they mirror the buy-and-sell behavior of stocks. This also means that their value can change drastically during the course of a trading day. This can include anything from emerging markets to commodities, individual business sectors such as biotechnology or agriculture, and more. Due to the ease of trading and broad coverage, ETFs are extremely popular with investors.
Some investments, such as hedge funds, are only permitted to wealthy investors. Alternative Investments There is a vast universe of alternative investments, including the following sectors: Real estate: Investors can acquire real estate by directly buying commercial or residential properties. Alternatively, they can purchase shares in real estate investment trusts REITs.
REITs act like mutual funds wherein a group of investors pool their money together to purchase properties. They trade like stocks on the same exchange. They also tend to impose net worth requirements. Private equity fund : Private equity funds are pooled investment vehicles similar to mutual and hedge funds.
A private equity firm, known as the "adviser," pools money invested in the fund by multiple investors and then makes investments on behalf of the fund. Private equity funds often take a controlling interest in an operating company and engage in active management of the company in an effort to bolster its value.

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