Today there is a wide range of investment choices: stocks, bonds, mutual funds, Treasury securities (including savings bonds), options, commodities, commodity futures, real estate investment trusts (REITs), variable annuities and many more. You must investigate before you invest-and remember that every investment involves some degree of risk. These investments are not insured by the federal government if they lose money or fail, even if you purchase them through a bank or credit union that offers federally insured savings accounts.
Make sure you have answers to all of these questions before you invest:
How Quickly Can You Get Your Money Back?
Stocks, bonds, and shares in mutual funds can usually be sold at any time, but there is no guarantee you will get back all the money you paid for them. Other investments, such as limited partnerships, often restrict your ability to cash out your holdings.
What Can You Expect to Earn on Your Money?
While bonds generally promise a fixed return, earnings on most other securities go up and down with market changes. Also, keep in mind that just because an investment has done well in the past, there is no guarantee it will do well in the future.
What Type of Earnings Can You Expect?
Will you get income in the form of interest, dividends or rent? Some investments, such as stocks and real estate, have the potential for earnings and growth in value. What is the potential for earnings over time?
How Much Risk is Involved?
With any investment, there is always the risk that you won’t get your money back or the earnings promised. There is usually a trade-off between risk and reward: the higher the potential return, the greater the risk. The federal government insures bank savings accounts and backs up U.S. Treasury securities, including savings bonds. Other investment options are not protected.
Are Your Investments Diversified?
Some investments perform better than others in certain situations. For example, when interest rates go up, bond prices tend to go down. One industry may struggle while another prospers. Putting your money in a variety of investment options can help to reduce your risk.
Are There Any Tax Advantages to a Particular Investment?
U.S. Savings Bonds are exempt from state and local taxes. Municipal bonds are exempt from federal income tax and, sometimes, state income tax as well. For special goals, such as paying for college and retirement, tax-deferred investments are available that let you postpone or even eliminate payment of income taxes.
The Securities and Exchange Commission (SEC) requires public companies to disclose relevant financial information to help you make sound decisions. You can view the text of these files online. You can also call SEC’s toll-free Investor Information Service at 1-800-732-0330 to obtain free publications and investor alerts or to learn how to file a complaint. The Financial Industry Regulatory Authority (FINRA) also provides up-to-date market data and information for a wide range of stocks, bonds, mutual funds, and other securities through its Market Data Center.
Source: Federal Citizen Information Center