What is Back Stop?
Backstop refers to the last type of support provided for unsubscribed shares or securities offered in the sale of unsubscribed shares in the stock an…
11 May, 2022
8 min read
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By directing your money towards the stock market, you stand the chance to grow your wealth considerably. It isn’t out of the ordinary for experts to recommend well-diversified investment portfolios that group securities that are safe as well as those that are risky together. Over a long time frame, a portfolio of this nature is capable of growing and can maintain a better position against the market as well as against the economic volatility that prevails. 2022, however, has proven to be an extraordinary year which is evident from inflation that has been rising along with bond yields while certificates of deposit rates remain low lying. Each of these factors has left several people worried about where to direct their money. Consider the suggestions featured below such that you have a better chance of protecting your financial future.
These accounts allow you to keep your money liquid while simultaneously generating a modest return. While they are rarely able to match the pace at which inflation operates, high-yield savings accounts are ideal for you to keep your money as they can be accessed with ease and can be a viable place to store an emergency fund. Further, they have limited risks which adds to their appeal. That being said, it is important to note that no high-yield savings account pays anywhere close to the seven per cent inflation that has reigned supreme over the past year. A large majority of these accounts offer 0.6 per cent returns. In the event that interest rates continue to rise, a number of savings accounts may benefit from their returns hiking up as well. A caveat one must always bear in mind when considering variable-rate accounts is the fact that the opening rate is subject to change.
In the event that you feel you don’t need to gravitate towards your savings in a hurry and would like to give them a chance to grow, certificates of deposit may come in handy. Banks issue these accounts at a higher fixed interest rate in comparison to a majority of the savings account. Certificates of deposits issued in America are insured and protected by FDIC making them a great choice for investors who are risk-averse and would like to minimize the corrosive abilities of inflation.
By and large, certificates of deposit are categorised as short-term to medium-term investments. Once you direct your money towards this investment you aren’t able to access it (unless you pay a penalty) until the date of maturity which may range from a period of 6 months to 5 years. As a general rule of thumb, you must ensure that you don’t invest any funds that you will need to use in the near future.
That being said, as an investor, you also have the choice to open several certificates of deposit over the course of multiple months or years. By incorporating this suggestion, you can take advantage of changing interest rates and can gain access to your funds on a regular basis while your accounts mature. You then have the choice to withdraw your cash or roll your account into a new certificate of deposit.
I-Bonds serve as a kind of government debt that the American treasury issues. They vary from traditional savings bonds as they adjust their interest rate every 6 months in order to position themselves in accordance with inflation. This makes them one of the best investment options given the inflationary nature of the year 2022.
That being said, there do exist certain limitations associated with I-bonds. For starters, if you wish to retain all the interest your I-bonds have earned, you must be willing to hold them for a minimum period of 5 years. Further, you are only entitled to purchase USD 10,000 worth of I-bonds in a given year although an additional USD 500 from an American tax refund can be directed towards I-bonds.
Index funds serve as investments that follow a number of indexes in terms of their general composition and returns. What this means is that if you wish to invest in an index fund you can purchase one that tracks the index of your choice the Nasdaq-100 or the S&P 500. It is worth pointing out here that certain index funds focus on specific industries or sectors and provide you with the opportunity to add exposure to areas that interest you.
The benefits associated with investing in index funds range from low expense ratios, a great deal of diversity and the ability of individual investors to access them with ease. You have the choice to purchase funds that trade as mutual funds or as exchange-traded funds. A number of brokerages permit investments in index funds for a modest figure.
While index funds often have a greater deal of volatility attached to them in comparison to government bonds and savings accounts, they are often viewed as a safer means of investing in the stock market and overcoming inflation.
Exchange-traded funds act in a similar manner to index funds in the sense that they invest in a fair number of securities. After doing this they group their investment into individual shares that then go on to trade on an exchange in the same manner as stocks. A large number of ETFs make purchases within a certain commodity, sector or index thereby permitting investors to specialise a segment of their portfolio.
There are a number of benefits that ETFs and index funds have in common that include simple portfolio diversification and low costs. ETFs are also tethered to enhanced tax efficiency in comparison to individual securities being handpicked.
Dividends refer to the small cash sums that shareholders are paid from a company’s profits that are used to reward the shareholders for owning the company’s stock. Owing to their nature, dividend stocks are worth investing in this year as they can help boost gains and can reduce the effects of inflation.
The value of dividend stocks lies in the fact that they allow you to earn a small sum of cash in the short term while simultaneously providing the benefit of long-term rises evident in share prices. The holders of these stocks are entitled to reinvest their dividends right back into their portfolios.
This isn’t to say that dividend stocks aren’t without certain risks. Although they may be viewed to be safer in comparison to non-dividend paying or growth stocks, not every company that pays a dividend is worth investing in.
As a general rule of thumb, you should conduct adequate research and see whether the company has a history of making regular dividend payments that have increased over time.
Prior to putting your investment strategy into place, you must always take into account your threshold for risk, the time frame you are willing to allocate to your investments, and your financial situation. You must also understand what your goals and purpose of investing are and whether they align with the security you opt for. Your knowledge and comfortability with investing can impact whether you partake in passive investing or active investing.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.
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