Before you even start investing your hard-earned money, you should decide what you’d ultimately like to accomplish. Here are a few possible reasons for investing your money:

a) To have money for retirement

b) To build a college fund for yourself or your family

c) To have some extra money for a “rainy day”

Whatever your reason(s), make sure you choose an investment that’s right and meets your need(s).

Investment options

There are a wide variety of investment options from which to choose. Here are a couple of the major ones:

1. Stocks, also called equities
2. Bonds, also called debt
3. CDs–bank and brokerage
4. Moneymarket–bank and brokerage
5. Treasuries–US government securities (financial products)
6. Options
7. Commodities
8. Real estate

Evaluating investment options

The biggest mistake you can ever make is pick an investment you don’t understand! Those people will either rely upon the advice of someone else, and/or see "dollar signs" and jump at the money potential. Do not fall for these or you could loose your hard-earned money! Instead, think about it. And make sure you understand what you’re getting yourself into. In other words, know the risks involved!

Moneymarkets

These are offered by banks and brokerage houses like Charles Schwab, Merrill Lynch, etc. But the basically work the same. Simply put, they’re higher earning checking accounts.

The difference is that your money is invested in highly liquid and relatively safe investment vehicles. For instance, a variety of cds and government securities. Because they earn more than a typical bank account, that extra is passed along to you.

So if you’re looking for a relatively safe investment vehicle that doesn’t require a lot of money, moneymarkets are an excellent choice. Depending upon where you open your account, it could be opened for as little as $500 or as much as $10,000.

And most brokerage accounts will automatically sweep (move) your free cash into their moneymarket. This way, you earn a bit more. Many will also give you checks and a debit card.

• TIP: A debit card deducts money directly from your account. So if you don’t have it in there, it’ll reject! That’s the difference between a debit and credit card. Debit cards are limited to the bank balance in the account. Credit cards are totally independent.

Government securities

These are often treasuries for short. And they consist of three types:

a) T-bills

b) T-notes

c) T-bonds

The “T” stands for treasury. And the difference between these three is esentially the time frame involved.

T-bills are short term investments–less than one year–that are bought in blocks of $10,000. And are in essence, similar to a bank cd, except they’re backed up by the US government.

T-notes are medium term investments–1 to 10 years–that are bought in blocks of $1000. Think of these as medium term bonds that are backed by the US government.

T-bonds are long term investments–10 to 30 years–that are bought in blocks of $1000. Look at these as long term bonds backed by the US government.

In other words, treasuries are US government issued securities that offer you the potential to profit more than a moneymarkt. And they are considered relatively safe because they’re backed by the government.

Now I should make it clear it’s not like FDIC insurance on a bank account. With FDIC, your money is insured in case the bank closes or gets into financial trouble. So you won’t loose your money.

But with treasuries, you don’t have that level of protection. The US government backs them in the sense that they’re not going to go away (disappear) anytime in the future. So they’re always going to be around.

And since they’ll always be a US government, there’s always someone there to hand you your money. So that’s why treasuries are consided to be relatively safe investments. The US government will always be around and not default (not pay) on them. So the likelihood of loosing your money is extremely slim and minimal.

Bonds

Companies and governments issue bonds as a way to finance their projects, investments, and operations.

Bonds pay a fixed rate of interest and have a specific timeline called maturity. In other words, they’re like cds in the sense that they expire after a certain length of time.

Here’s how bonds essentially work. You buy a bond with a given interest rate and maturity. The bond issuer will give you those interest payments over those years. Thus, you have a steady stream of interest payments and a guaranteed income. At the end, when the bond matures, you’ll get your original investment back.

So if you buy a 5%, 30 year bond with a par value of $1000, you’ll get 5% interest payments over the next 30 years. 30 years from now, you’ll get your $1000 back.

Sounds too good to be true doesn’t it? Yes and now. Because you’re dealing with the future, the bond issuer may not be in existence. Or they may default (not pay) on the bond. So it’s not an absolute 100% guarantee of getting your money back. And that’s the main risk.

However, bondholders do have a claim against a company’s assets in many cases. In other words, if a company is liquidated, bondholders get paid before others, like stockholders. So you stand a better chance of recouping your investment.

And many companies create what’s called a sinking fund. This is money set aside specificially to help repay the bond. So it’s like an insurance policy. Sinking fund money cannot be used for company operations or in cases of emergencies. It set aside just to repay bondholders!

Bond ratings

S&P and Moody’s are the two largest bond raters. They evaluate a large number of bonds, all different types and issued by many different sources–government and corporate.

The higher the rating, the safer the bond is. The lower the rating, the less safe it is. And they readjust the ratings depending upon the bond issuer’s financial situation. For instance, if the company gets into trouble, they may lower their rating on the bond.

To simplify things, consider bonds rated below C to be "junk." In other words, they’re the most risky and you stand a pretty good chance of loosing your investment!

Why do people buy them? Because their rates and potential return (profit) is higher. In other words, the more risk you take, the greater profit you may reap.

I suggest avoiding falling into this trap unless you can really afford to loose that money. And in today’s tough economic times, I don’t think you really want to risk your money.

So I suggest buying bonds that are rated A to B. You may not make as much as the lower rated ones, but your investment is safer. And if you decide to, maybe C. But I wouldn’t go any lower.

• TIP: Government bonds–federal, state, and local (municipal)–can offer you some tax savings! In other words, the interest may be tax-free.

You may not earn as much as you would on taxable corporate bonds, but the tax savings might offset this.

Stocks

Unlike bonds, where you have a guaranteed interest rate and length of time, you don’t get this with stocks. However, it’s generally much cheaper to buy shares of stock than bonds. And stocks often provide greater profit potential than bonds. That because they could rise more over time.

FYI, there are companies that issue both stocks and bonds as a way to obtain money (cash infusion) from the investors.

When you buy a stock, you are becoming an owner in the company. Your stock represents your share of the company. This means, you get to vote on important issues. For instance, Board of Director members, whether or not to approve a merger, etc.

But make no doubt about it, stocks are more risky! Why? Because you don’t have that guarantee as you do with bonds. And because you are last in line if a company gets into financial trouble and is liquidated. So pick and choose your stocks carefully.

• TIP: Value Line provides ratings on a large number of stocks, so check them out.

Mutual funds

Mutual funds are like gift baskets. They contain a variety of different items in one place.

Now you can have a giftbasket with a variety of cheeses. In other words, they’re all the same except for the brand and type. A stock mutual fund like this would be one that invests solely in a particular industry, type, or region.

Examples would be: Mining, Global, Utility, and small-cap.

Your other option is to have a giftbasket that has a little bit of everything. For example, a basket that has some wine, some cheeses, and some candy. A mutual fund like this would contain stocks from a variety of industries, regions, or types.

In other words, you may have some utility companies, some foreign, some automakers, and some hospitality. It’s a mixed bag!

• TIP: Morningstar is a mutual fund rating service. Check out their ratings and fund descriptions before you invest.