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Before you start investing, you should know something about investments. Most "regular" investments, sometimes called "paper investments" (real estate and running your own business excluded) fall into three main categories, called asset classes: Cash, bonds, and stocks. Most established investors have a portfolio (fancy-sounding term meaning they own stuff) consisting of all three asset classes, in varying proportions).
Cash investments are pretty simple. There's a lot of safety here (little or no risk of losing the money you invest), but not a lot of return. This category includes things like savings accounts, CD's, money market accounts, money market funds, and a few other types. Basically, you're giving your cash to someone else (the bank, etc) so that they can loan it to other people. In return for this loan, the bank pays you interest. The bank makes money because it can get a better rate of return than it passes on to you, and it pockets the difference. These are some of the safest investments, but their low-yield makes them inappropriate for long-term investment: your money just won't grow enough. In some cases, you might not even keep up with inflation (which has averaged about 3.1%), so your purchasing power will actually decrease over time. Cash investments are appropriate for money you may need to access soon (within a year or two). They're usually pretty liquid (you can get your money pretty quickly when needed). A long-term average return from cash investments is usually around 3-4%
While we're talking about cash investments, there's something important to discuss here. Everyone should have an Emergency Savings Fund: a nice big pile of cash to fall back on should you experience financial troubles at some point in the future (and who won't?). With this safety cushion, you won't need to tap into your long-term investments in a crisis, and they can grow like they're supposed to. While a magic number like "three to six months of living expenses" is what I've heard from most financial planners, it's only a rule of thumb. The bigger your stash, the more secure you'll be. I like this number though, and three months is a nice initial target for most people to shoot for. I think people should establish this fund before investing for long-term growth, but some people do it concurrently.
Where to save this money? Your checking account is NOT the best place. It'll be too easily accessible, and you may be tempted to spend it. Find a place where it'll do you some good. Two things are important when choosing your cash investments: your rate of return (regular savings accounts don't pay you enough interest), and liquidity (how easily you can get your cash). I'd recommend (in order of my preference) money market mutual funds (MMF's), Certificates of Deposit (CD's) with a 3 month-1 year maturity date, or money market accounts (MMA's), which are available at banks and credit unions. In my experience, money market funds pay you the most without locking away your money like CD's do. They are mutual funds that invest in cash investments that you can't get at directly. With Certificates of Deposit, you have to pay an early withdrawal penalty if you take out your money before the maturity date, so your money is locked away a bit more. If CD's are paying much more than MMF's (like, 0.5% higher), go with them if you don't expect to need the funds before the CD's maturity date. I've never seen a money market account that offers as much interest as the best money market funds, but if you find one, feel free to use that. As of January 2008, you should be getting an interest rate of about 4.5% on these funds, so every $1000 you have will earn you an additional $45 each year. Check Bankrate.com for their highest-yielding money market funds. Investing online often helps get you the highest yields. Some appropriate places to look include ingdirect, emigrantdirect, and hsbcdirect. I actually have my emergency savings with Vanguard, in their Prime Money Market Fund It's consistently one of the highest-yielding money market funds: because of its low fees, it's been in the top five every time I've ever checked at Bankrate.com. They do require a minimum of $3000 to open an account though, so if you're working with smaller numbers, feel free to start elsewhere, at least until you meet this minimum. More about Vanguard later, they're my favorite investment company.
Bonds are actually pretty similar to cash investments in a few ways. You're loaning your money to a group (company, government, etc), and they promise to give you a certain rate of return. They typically pay a bit more than cash investments, but the period of time your money is "locked away" is usually longer. Bonds can be short-term (1-3 years), intermediate-term (3-10 years), or long-term (10 years+). Most people don't invest in bonds directly (most single bonds usually sell for $10,000 or more), but invest in this asset class using a bond mutual fund (more about mutual funds later). Bonds tend to be relatively stable investments, at least more so than stocks. Usually, the longer you loan your money for, the higher the promised interest rate return, but this isn't always the case. Right now (mid 2007), for instance, we're experiencing an inverted yield curve, which basically means you get the best deal from shorter-term bonds. Long-term bonds also fluctuate more in price than shorter-term ones, so they're a little riskier, and the chance of losing money is greater if you hold them in a mutual fund or sell them before the bond reaches it's maturity date. There are a bunch of different flavors of bonds. The treasuries (loans to the U.S. government) are considered the safest, but usually offer the least interest. There are also agency bonds, municipal bonds, and corporate bonds, among others (look them up online if you're interested in knowing more about the specific types). Some have nice tax advantages for the uber-rich, but for those of us just starting out (and not in a really high tax bracket), usually just picking the one with the highest return works the best (with the possible exception of high-yield, or "junk" bonds). It's probably best to stick with short or intermediate term bonds, since they're more stable in price than the longer-term ones, and bonds are usually added to a portfolio for their relative stability. Unless you have $50,000 or more to invest in bonds directly, buying a bond mutual fund is the way to go. Again, Vanguard has some great ones. An average long-term return for bonds (in general) is usually around 5-7%
Stocks are the other major asset class. They are considered the riskiest of these three asset classes (their prices jump around a lot, with big ups and downs), but over the long term, they yield the greatest return. When you buy a stock, you buy partial ownership in a company, and are entitled to a portion of that company's profits. Your money grows in two ways: some companies pay a stock dividend to their shareholders, giving you small amounts of cash on a regular basis (quarterly, yearly, etc), while some companies reinvest that money in the company to fuel additional growth, which (hopefully) leads to additional growth, and capital appreciation (the price of each share of stock going up). There are different terms you may hear applied to different stocks (or groups of stocks, like a stock mutual fund). One term to be aware of is the market capitalization, or "market cap". This reflects how big the company is. Big companies are "large caps", while small companies are "small caps", with "mid caps" in between. Other terms that get applied to stocks are value, and growth (to represent how "expensive" a stock is, based on something called it's "price to earnings ratio", or "P/E"). Here, value stocks are "cheaper", meaning that they have a lower stock price for each dollar of earnings, while growth stocks are the ones you hear about all the time: Microsoft, Amazon.com, and all the other "popular" companies that attract a lot of attention from investors. I prefer a value-based approach, and some research suggests that will yield more in the long run (more on that later), but it's probably a good idea to have a mix of both value and growth types in your portolio. While there are a lot of domestic stocks available (companies based in the United States), there are also a lot of international stocks (companies from other countries). While you may start with just domestic stocks, it would be a good idea to invest in international stocks as well (at least eventually). While some people buy individual stocks, investing through a mutual fund (which buys a bunch of them for you to create a diversified portfolio) is often a better idea. Stocks, over the long term, have yielded a return of about 10-11%.