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6 Questions to Ask Yourself Prior to Making an Investment

Oct 03 2011

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If you have financial goals in mind and you've already paid off all of your credit cards, then there's still some factors to consider regarding investing for the future.  This could be savings for the purchase of a house, college tuition, or retirement planning.

You still have to know not only how you plan on utilizing the savings in the future, but you also have to ask yourself several other questions. Many of these types of investments are not are not insured or guaranteed by the U.S. Government. Before you make your investments find out the answers to the following 6 questions:

1 - If something goes wrong can you get your initial money refunded?  Many investments are liquid that means that eat. They can be sold quickly, and those include mutual funds, bonds, and stocks. But there is no guarantee with these types of investments that the money you paid will be recovered.

2 - How much interest can I make on the money? The earnings that you can expect from both most investments fluctuate with market conditions, although bonds typically have a fixed rate of return. Euless also take into consideration that just because the performance of an investment has been stable or positive in the past. There is no way of knowing how well it will perform in the future.

3 - How much can I expect to earn?  Some investments pay earnings in the form of dividends or interest. You may also have a real estate investment where you may receive rental income. Other investments, including real estate and stocks have the possibility for both an increase in value plus earnings.

4 - How risky is the investment?  All investments are risky, but some are definitely riskier than others. Generally, the investments with the most risk also offer the greatest opportunity for reward. While the safest investments pay or yield the lowest returns.

5 - Have you diversified your investments?  It's important to keep a diversified investment portfolio in order to be able to withstand the markets fluctuations. Typically, when the value in one market decreases other markets increase in value. By placing your savings in various types of investments your exposure to risk is minimized.

6 - What are the tax advantages?  Some types of investments are exempt from local and state taxes like savings bonds from the U.S. Treasury. While other investments are exempt from federal income taxes such as municipal bonds. There are also some investments that are tax-deferred that allow an individual to postpone the payment of taxes until a later date.

 

The author James Blackwell regularly writes about personal finance and money matters. He also runs the site brokerreview.org which offers impartial user reviews on stock brokers like Optionshouse and Scottrade.

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