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Stocks and Bonds May Be a Different Language to You, But They Could Hold The Key to Your Financial Future

Almost anyone who has saved money has at some point thought about investing it. I'm not talking about one of those bank accounts that pays 2% interest. When you factor in inflation, these accounts often lose real money value. I'm talking about taking a risk and investing in stocks and bonds.

What's the difference between stocks and bonds? Well, stocks are like a piece of ownership of a company. You can use your stock to vote at shareholder's meetings, which can allow you to vote for such things as buyouts of other companies. Each share of stock is worth a vote, so the people with huge stakes in a company have the most voting power.

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A bond represents debt. Bonds can be issued by companies, municipalities (such as the city you live in), or the Federal government. You are essentially buying up the debt of an entity and earning a return on it based on the interest rate. There is a risk that the bond will not be paid back, called default. If the default risk is high, the price you pay is much lower than face value (which translates to a high interest rate). For instance, a United States bond is considered to be the safest investment in the world. There is almost a 0% chance the US government will default on a bond. Therefore, the price you pay for a US bond will be close to the face value. The interest rate for this bond is based on the reward the government is giving you for giving them money now and not having to pay you back until later. If an unstable company issues a bond, the price will tend to be much lower than face value, meaning you get a high interest rate (or rate of return). For instance, General Motors bonds recently were demoted to junk status by bond analysts. This means people who study companies think there is a greater chance General Motors will default on these bonds in the future.

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Good investing usually involves spreading your money around to a variety of different investments. Do not put all your money in stocks, or all of it in high-risk bonds. A young person should invest in riskier investments (but even these investments should be based on smart research), while older people should invest more in highly rated bonds. The theory here is that risky but smart investments tend to pay off big in the long run, and young people have lots of time to earn more money if the investments don't pay off. Older people may not be around 30 years from now to see those risky investments pay off.

The lesson I want you to learn here is that you should invest in solid companies with growth potential, and spread your money around to many different companies in different sectors (ie - not everything in technology). Economic changes can sometimes target certain industries, such as we saw with the dot-com bubble bursting. Remember to put some money in the staples, or companies that will probably be around 50 or 100 years from now, like Coca-Cola or McDonalds. They won't triple in value in a year, but they probably won't go bankrupt either.

Here's a good list of stocks to start with