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3BestLongTermInvestments

3BestLongTermInvestments
By:InvestorGuideStaff,datedJanuary25th,2013
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Fundsthatwillnotbeneededtopayexpensesortomakeneartermpurchasescanbeinvestedinsecurities.Agoodinvestmentwillaccruevalueover
time,butinordertotakeadvantageoftheopportunity,youmustoftenallowyourmoneytobeoustideofyourdirectcontrolforasignificantperiodof
time.Otherwise,shorttermvolatilitymayerasethebenefitsofanotherwisesoundinvestment.Therefore,youshouldonlybebuyingsecurities
likestocks,bondsandmutualfundswithmoneythatyouwillnotneedintheforeseeablefuture.
Differentinvestmentswillbeappropriatefordifferentinvestors.Yourage,amountinvested,andreasonsforinvestingwillhaveasignificanteffecton
whichtypesofsecuritiesyouwillchoose.Onceyouunderstandwhatthemostcommoninvestingoptionsare,continuetothesectiononbuildinga
portfoliotolearnaboutputtingthemtoworkforyourspecificfinancialsituation.

Stocks
Purchasingsharesofstockgivesyoufractionalownershipofthepubliccompanyinwhichyouhaveinvested.Essentially,atleastaportionofthe
successofyourinvestmentwillbetiedtothesuccessofthecompany,or,morespecifically,tothedesireofotherinvestorstoownthesamecompany
(sinceintheshorttermitsinvestorswhocollectivelydeterminetheshareprice).Ifthepriceofthestockincreases,yoursharesbecomemorevaluable
andyoucansellthemformorethanyouboughtthemfor.Ifthepriceofthestockdecreases,yousharesbecomelessvaluableandyouwillreceiveless
thanyouinvestedwhenyousell.
Additionally,somecompaniespayadividend,whichisessentiallytheactofreturningaportionofthecompanysprofitstoitsstockholders.Dividends
alwaysincreasethereturnonyourinvestment.Theymaybepaideitherincashorintheformofadditionalsharesofstock.
StockstradeonexchangessuchasNasdaqandtheNewYorkStockExchange(NYSE).Investorscanpurchasesharesthroughafullserviceor
discountbrokerbypayingacertainfee(calledacommission)inadditiontothepriceofthestockatthetimeofpurchase.Thesameprocessisused
whenitcomestimetosellexceptthesharesareexchangedfortheirvalueincashminusanotherfee.DividendReinvestmentPlans(DRIPs)areanother
waytoacquirestock.Thestockisoffereddirectlybythecompanyandanyfeesaregreatlyreducedoreliminated.
Investinginstockscanbequiterisky,soitisimportanttoresearchpotentialpurchasesthoroughlyinordertoidentifystockswiththepotentialtoproduce
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significantreturnswithouttoomuchdangeroflosingvalue.Itisusuallyinyourbestinteresttoholdontostocksforayearormore.Thereasonsforthis
includethefeesassociatedwithfrequentbuyingandselling,thetaxadvantagesgainedbyowningstockforatleastoneyear,andpossiblymost
important,thefactthat,intheshortterm,volatilitymaypreventanotherwisegoodinvestmentfromaccruingvalue.Giventime,asoundinvestmentmay
recoverfromtemporarydips.

Bonds
Buyingbondsisawayoflendingmoneytobusinesses,governments,orotherentities.Theamountinvestedispaidbackovertimeandisaugmentedby
interest.Therateofinterestvarieswiththeprobabilitythattheoriginalloanamountwillbesuccessfullypaidback.Riskyloansreturnmoreinterest,but
thereisadangerthattheborrowerwilldefaultontheloanandsomeoralloftheoriginalinvestmentwillbelost.
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Inadditiontorateofinterest,bondsvaryinthelengthoftimeoverwhichtheborrowedmoneyisrepaid(calledthetermorduration).Throughoutthis
duration,theamountofmoneyyettobereturnedwillearninterest.Somebondsreturnprincipalandinterestatintervalsthroughoutthetermandothers
returneverythingattheendoftheterm.
Thevalueofagivenbondchangesasprevailinginterestratesandthefinancialhealthoftheborrowerchange.Forthisreason,somebondscanbe
tradedonasecondarymarketbeforetheendoftheirterm.
Generally,bondsareasaferinvestmentthanstocks,but,asaresult,theprospectsforastronomicalreturnsareslim.Also,notallbondsaresafe
investments,soitisimportanttoresearchthemasthoroughlyasanyotherinvestment.Thesafestoptionarebondsbackedbythefederalgovernment,
whichareguaranteednottobedefaultedon.However,becausetheyaresosafe,theyofferonlyamodestinterestrate.

MutualFunds
Amutualfundisnotadifferenttypeofinvestmentsomuchasitisacollectionofstocksand/orbonds(andpossiblyotherinvestments)mademore
accessible.Mutualfundspoolthemoneyofmanyinvestorsandpurchaseinvestmentsaccordingtoeitherapredeterminedstategyorinaneffortto
mimicanindex,suchastheNasdaq100ortheS&P500.
Fundsareeitheractivelymanagedorpassivelymanaged.Activelymanagedfundsarerunbyamanagerwhochooseswhentobuyandsellinvestments
inanefforttoproducethegreatestreturnsforthefundsinvestorswithoutstrayingfromthegeneralprinciplesthatledthoseinvestorstosignoninthe
firstplace.Passivelymanagedfunds(calledindexfunds)simplyholdsecuritiesinthesameproportionsastheindicestheyseektomimic,andbuyand
sellinvestmentsonlytomaintainthepropercompositionandbalance.
Mutualfundsofferseveralbenefitstoinvestors.Mostimportantly,individualscaninvestinabroadcrosssectionofstocksandbondswithoutneeding
enoughmoneytoinvestineachsecurityindividually.Thisdiversificationprotectsagainstisolatedvolatilityandallowsinvestorstobankonsaferentities
likeasectororcertainsizecompanyinsteadofbankingonthesuccessofasinglecompany.Thepricefortheseadvantagesisoftenthefeerequiredto
buyorsellsharesofamutualfundandthepercentageofreturnsthatarepaidasexpensestotheoperatorsofthefund.However,somefunds,and
especiallyexchangetradedfunds,eliminateagreatdealofthefeesinvolvedandallowinvestorstobuyinwithminimalextracosts.

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