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Investing is essentially putting your money to work for you. You will earn or lose money based on the performance of what you invest in. While investing can be a great way to build your wealth, it’s important to know a few things before entering an investment opportunity:
What are my goals? You should know what your end goal is for investing before purchasing anything. For example, are you looking to save for retirement or do you want to make money fast? How much money are you willing to invest and what type of return are you hoping for? Your goals will influence the type of investment you enter in.
What is my risk tolerance level? Every investment carries some level of risk. Investments with a low risk will make small gains and losses while investments with a high risk stand to gain or lose higher amounts of money. Investors should consider how comfortable they are with smaller versus bigger losses and gains before entering an investment opportunity.
Is the investment registered and the person selling it licensed? In the state of Indiana, all securities and the people who sell them must be licensed and registered with the Indiana Securities Division. Use the searchable databases or contact the Securities Division to make sure everything checks out before you enter an investment.
It's a time-tested truth that education is the key to success in nearly all areas of life—including investing. Consumers that make informed investment choices are significantly less likely to fall victim to fraud, and in turn, less likely to lose their money in unsound investments.
We have included some helpful information and valuable resources for current investors and Hoosiers who may be considering investing in the future.
Americans lose an estimated $40 billion a year to investment fraud. Whether working with an investment broker or a trusted friend, it’s important to investigate before you invest to avoid falling victim to investment fraud. In addition to checking licensing and registration of the investment and the person selling it, here are a few things you should always do when investing:
Get written information. Every investment opportunity should have a prospectus that outlines the details of the investment. Once you enter an investment, be sure to closely examine your financial statements for suspicious activity.
Ask questions. If the person is legitimate, they should not hesitate to answer any questions you have. If they hold back details or avoid giving written information, tell them you are not interested and walk away.
Don’t rely solely on the testimony of others. Just because someone else made money doesn’t mean you will or that the investment is legitimate.
Be skeptical of promises of high returns. If someone offers returns that seem too good to be true, they probably are.
Annuity: A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Investors are typically locked in for a specific amount of time and can incur high fees if they try to withdraw money from the annuity early.
Bond: A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.
Broker: An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
Certificate of Deposit: A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.
Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Futures: A futures contract is a legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.
Hedge Fund: An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns. Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
Investment Adviser: any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications.
Mutual Fund: A fund operated by an investment company that pools funds from multiple investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.
Option: a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset at a later day at an agreed price. In return for granting the option, the seller collects a payment (the premium) from the buyer.
Promissory Note: A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date.
Prospectus: A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A prospectus, also known as a circular or offering, should contain the facts that an investor needs to make an informed investment decision.
Return on Investment: A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.
Risk: the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. Every investment carries some level of risk. There is never a guarantee that you will make any money.
Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
Suitability: A situation (and sometimes a legal requirement) that an investment strategy meets the objectives and means of an investor. In most parts of the world financial professionals have a duty to take steps that ensure that an investment is suitable for a client.
Viatical Settlements: An arrangement in which someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies. Also referred to as a Life Settlement, this type of investment is incredibly risky.