If you were to start a business, you'll need to have money saved up to invest it in your business. To help you make an informed decision about whether to save or invest that payment, information about the differences between saving and investing follows.

 

To save money means to put it aside, in a bank account, for buying something in the future or to have on hand in case of an emergency. That money is available for you to withdraw whenever you need it. Although the bank may pay interest on the balance in your savings account, that interest often does not keep up with inflation, which is the rise in the cost of goods over time. Therefore, savings accounts are only one portion of a balanced financial plan.

 

When you invest money, you have an entirely different objective: to make more money.
A financial investment is something you put money into with the purpose of
getting more money back. An investment also can be one of time and
labor. For example, you might invest in a lawn mower with the goal of
making enough money mowing lawns over the summer to earn a profit.
You also are an investment. You can invest in yourself through education,
for example, or by learning new skills or trades. Education and self-
improvement can help you earn more income. In fact, of all the types of investments available, investing in yourself is the best investment you can make. It can pay big dividends.

 

Unlike saving, investing involves some risk—that is, you are not guaranteed to earn more than the amount you invest. (The amount you invest is called principal.) In fact, there is a chance you could lose part or even all of the principal. Investing is used to achieve certain types of goals. People typically save for short-term goals such as a new car or a family vacation by putting their money in a savings account where they can retrieve all of the money plus a little interest. But people invest for long-term goals like college or retirement. They put their money in stocks, bonds, real estate, or other alternatives, which do not guarantee the principal invested or any earnings on the principal. However, because of the greater risk, investors have a chance to earn higher returns (income or an increase in value) than they would from a savings account, especially over a long time. In general, higher potential returns often require accepting greater risk of loss, while a lower risk of loss often means lower potential returns.

 

In 2008, stock prices fell in what is called a bear market. For several years before the bear market, stock prices rose to unprecedented heights during what is called a bull market. History has shown that the stock market has had many bear and bull markets. Overall, stock prices have risen over long periods of time. However, the economy has taken a hit in recent years worldwide, and past performance does not guarantee future results.

 

TYPES OF INVESTMENTS

Financial investments take two basic forms: owned investments or loaned investments. That is, you are either a lender or an owner.

 

A loaned investment means you loan money to a company or government in return for its promise to repay the principal (the amount you loaned) plus interest. Such an investment is similar to how you “loan” money to a bank through a savings account except that there is only a promise to repay the money, not a guarantee. The issuer makes regular payments of income, usually monthly or quarterly, for a set length of time.

 

Common loaned investments include money market funds; certificates of deposit; U.S. government bonds; corporate, municipal (city), and foreign bonds. Annuities are another type of investment vehicle offered by insurance companies. People normally purchase an annuity to receive income at some point in the future. Annuities may offer several investment options, including loaned investments and owned investments. As is also true of some other investments, the owner may need to keep an annuity for a certain period of time or there may be additional fees to pay. Yield is what an investment pays directly in income. Yield might be in the form of interest, dividends, or rental income from property.

 

You might already own one form of loaned investment if you have a savings bond. These make popular gifts for families and others to buy for children because savings bonds can be bought in small amounts (as little as $25). Savings bonds are a loan to the federal government. Bond issuers agree to repay the bondholder the amount invested plus interest over a set period of time. Governments or companies issue bonds to raise money to pay for certain projects, such as building roads and factories. Also popular are certificates of deposit (CDs), which are issued by banks. The investor lends the bank a specific amount of money for a specific period of time at a specific interest rate. This low-risk investment pays low but steady returns.

 

An owned investment means you own part or all of a company, real estate, or other asset. An asset is an item of value. If you buy stock in a large fast-food restaurant chain, for example, you actually own part of the company. Other people who bought stock in the company also own part of it. Because you own part of the company, you share in any profits or losses. As a stockholder, you might receive dividends (profits that the company pays to its stockholders). Dividends usually are issued quarterly (every three months). However, unlike interest payments from loaned investments, dividends are not guaranteed because a company cannot guarantee how much profit, if any, it will make.

 

You also can make money from an owned investment by selling the investment for more than you paid for it. For example, investors hope to sell stock at higher prices than they paid. You might have done the same thing with one of your possessions, such as a baseball card. Perhaps you paid $5 for the card and later sold it for $7. The $2 you made on the sale is a profit, sometimes called a capital gain.

 

Individual retirement accounts (IRA) offer tax breaks to people saving for retirement. Several types are available, and some, such as the Roth IRA, might be a good investment option for younger investors.

 

Common types of owned investments include the following:

• Stocks in U.S. and foreign companies

• Mutual fund shares

• Real estate (land, homes, apartments, office buildings)

• Personal business - like you'll design at Whitehorse!

• Commodities, such as gold, silver, and wheat

• Collectibles, such as paintings, rare stamps, rare coins, and baseball cards

 

Naturally, you would want to put your money into a low-risk investment that yields a high return. However, such investments are unlikely. Low-risk investments, such as government savings bonds, usually have a low rate of return. Conversely, investments having the potential for a high rate of return usually are high-risk.

 

People investing over a shorter period of time should choose safer investments with lower rates of return. However, investors seeking larger growth of their money over an extended period of time may choose riskier investments. In general, buying stocks is considered more risky than investing in something that pays a guaranteed rate of interest. When you decide to invest, you will have to determine your needs and goals. To balance the risk involved in investing, it is a good idea to diversify your investments, putting your money in different kinds of investments. For example, you can put some of your money in safer investments and some of your money in higher risk investments. This is known as diversification.

 

Government Savings Bonds

U.S. savings bonds are considered safe investments because they are backed by the full faith and credit of the federal government. Two common savings bonds are the Series EE and Series I. Series EE bonds are purchased electronically at face value, and can be bought for any amount from $25 up to $10,000 per year. EE bonds issued since May 2005 earn a fixed rate of interest. You know the interest the bond will earn when you buy it. You may cash in the bond at any point from 12 months through 30 years, but if you cash them in before five years you will forfeit the previous three months’ interest.

 

I bonds (the “I” stands for inflation) are purchased for face value, so you would pay $50 for a $50 bond. I bonds pay two types of interest—a fixed rate of interest plus an inflation amount that is announced every six months. When you cash in your I bond, you will receive the amount you invested plus both types of interest. While you can cash in your I bonds after 12 months, they are meant to be a long-term investment. Therefore, you will be charged a penalty fee equal to three months of interest if you cash these bonds in within five years of purchase. U.S. savings bonds are now issued only online.

 

Insured Certificates of Deposit (CD)

CDs are insured deposits that pay a fixed or variable interest rate over a specific period of time. Financial institutions offer CDs that mature in as few as three months or after many years. Your money must stay invested for a fixed period, so CDs generally pay more interest than savings accounts. Usually, the interest rate is higher the longer you hold the CD. However, as with other low-risk investments, the return usually is low. Mutual funds and quality growth stocks are normally considered to have a higher potential return, along with a greater possibility of loss than insured CDs.

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Quality Growth Stocks

These are shares in companies that are considered leaders in their particular industry and that have had consistent earnings and revenues greater than the overall growth of the national economy. Many of these pay small dividends, but the increase in stock prices can produce total returns well above inflation.

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Mutual Funds

Many people think it is too risky to put money into individual stocks. Instead, they might invest in mutual funds. A mutual fund includes stocks from dozens or even hundreds of companies. A company that manages mutual funds pools (combines) investors’ money to buy shares of stock in many companies. If one or more stocks lose value, successful stocks in the fund could offset the losses and the fund overall might not lose money. However, many mutual funds have excellent track records for earning money over a long period. Relatively high-risk investments include small and medium capitalization stocks and collectibles.

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Small and Medium Capitalization Stocks

These are shares in smaller companies worth up to $5 billion or so, that may have the potential for higher growth rates than larger, more established companies. These companies usually have a shorter history and thus are often considered to have higher risk than investments in larger, more stable companies. However, they also have the potential to generate higher rates of return.

 

Collectibles

You might already invest in collectibles such as baseball cards, rare coins, or postage stamps. Some people collect items such as these with the hope that the value of these items will increase over time. Collectors must study the market for the items they collect. Collectibles are generally considered to have higher levels of risk than many other investments. Examples of very high-risk investments include futures. These are contracts to buy and sell commodities, such as soy beans, gold, silver, oranges, cattle, and crude oil, at some time in the future. By buying a future contract, investors are speculating on the future value of that commodity’s prices. Buying commodity futures directly usually requires a large investment, but futures also may be purchased in mutual funds or exchange-traded funds for smaller amounts of money. However you purchase futures contracts, the potential risk is normally quite high, even for experienced investors.

 

You must be at least age 18 to trade on the stock market, but you can own stock if you are younger through a special custodial account opened by your parents or guardian. Investors usually buy at least 100 shares of stock at a time (called a round lot), but it is also usually possible to purchase fewer shares. Stockbrokers will often charge a higher fee for smaller stock purchases than for round lots.