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Investment Basics

After setting up a budget and deciding to invest, what kind of saving or investment would you do?
Saving and investing both make your money grow, but the return you earn from accounts that you set up at your bank may be barely enough to keep up with inflation. For the intermediate and the long term goals, you will need o move beyond the bank and put some of your money into other investments, such as stocks, bonds, and mutual funds.
Investment involves many types of risk, the more you know about risk; the better you will be determine your risk tolerance as it applies to various investment. Here are some risks you will want to consider:

  1. Market Risk: The risk that an equity investment’s value will decline due to the market, as a whole going down.
  2. Industry Risk (specific sector): The risk of all equities in a particular industry doing poorly
  3. Individual Security Risk: The risk of one particular security’s value declining.
  4. Economic Risk: The risk of a poor economy affecting the value of investments.
  5. Inflation Risk: The risk of inflation eating away at real returns.
  6. Currency Risk: The risk of exchange rates fluctuating.
  7. Credit Risk: The risk due to the possibility of a particular issue such as bond defaulting or being downgraded.
  8. Interest Rate Risk: The risk associated with changing interest rates.

Taking investment risks is not the frightening proposition you might think it is particularly if you have two things on your side:

  1. Diversification can cut your risks dramatically. If you invest in a broad portfolio of stocks, bonds, and mutual funds, you will give yourself a much better chance of long-term investment success.
  2. Time can cut your risks dramatically: Investments such as individual stocks tend to be volatile in the short term, but over the long term they have typically delivered good returns.


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