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Here are 4 Important Questions to ask before putting your money to work
For example, Lets say you want to accumulate money for a down payment on a home that you'd like to buy in a few years. You can't afford much investment risk with that money. You're going to need that money sooner rather than later. Putting that money in the stock market is not a wise move because the stock market can drop quite a bit in a year or over several consecutive years. So, stocks are probably too risky a place to invest for a down payment money you plan on using later. In another case, if your were to save for retirement, that is 20 to 40 years away. You should consider investing in growth investments like stocks. Since you have time on your side, you can tolerate year-to-year volatility in the market and your holdings will have more time to bounce back from temporary losses or setbacks. How to make your money work hard as you do:There are two main ways your money can grow, either by being a lender or an owner. Be a Lender - When you invest your money in a bank certificate of deposit, a Treasury bill, or a bond issued by a government or a company like McDonald, you are in effect lending money to - a bank, government or Corporation like McDonald. You are paid an agreed-upon rate of interest for your money. You are also promised to have your original investment which is also called the principal returned to you on a specific date. Advantages of being a lender: You are paid all of the interest in addition to your original investment (principal) as promised. Disadvantages of being a lender: You don't get everything you were promised. When a company goes bankrupt, for example, you can lose all or part of your original investment. Also as a lender, you do not share in the success of the organization to which you lend your money. If the company grows in size with lots of profits, neither your principal nor your interest will grow; they will stay stay the same. Of course, when the company is successful, it ensure that you will get your promised interest and principal back.
Be an Owner - You become an owner when you put your money in an asset, such as company's stock or real estate. They both have the capacity to generate income, earnings or profits. Suppose you buy 100 shares of McDonalds stock. Your 100 shares represent a very small piece of ownership in McDonalds. Advantages of being a owner: As an owner or a stockholder, you share in the profits of a company in the form of annual dividends as well as an increase in the stock price if the company grows and becomes more profitable. Real estate can produce profits by being rented out for more income than expenses or selling at a higher price than what you paid to buy it. Disadvantages of being an owner: The downside of being an owner is that if McDonalds stop growing or people stop eating at McDonalds, your stock can fall or even become worthless when the company goes bankrupt. With real estate, it takes a lot of work and time. You may also have to deal with problem tenants and fixing up the property.
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