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Janice France-Pettit: CDs, stocks and bonds: What does it all mean?

Union Bank

Posted: October 8, 2011 1:55 a.m.
Updated: October 8, 2011 1:55 a.m.
 

Investing in CDs, stocks and bonds is part of a financial strategy that might help you grow your savings over time. While investing in these can help you build personal wealth, it is important to educate yourself about them before entering into any investment opportunity. 

The following is some basic information about these financial investments:

Certificate of deposit


Certificates of deposit, better known as CDs, are time-deposit accounts that allow you to invest a fixed sum of money for a fixed term. In return for your deposit, the bank guarantees you an interest rate — usually higher than a checking or savings account.

CDs have the benefit of being FDIC-insured on deposits of up to $250,000 per depositor.

One drawback is that there is usually a penalty for early withdrawal of funds, which might make it difficult if you need the cash before the CD matures.

Stocks


At some point, every company needs to raise money. To do this, companies can either borrow it or raise it by selling part of the company, a process known as issuing stock.

When you buy a share of stock, you are actually taking ownership in the company in which you are investing.

Owning stock can be one of the most profitable ways to grow wealth over the long-term, as stocks have historically had an average return of around 10-12 percent; however, stocks do come with risks.

If the corporation you buy stock in does well, its value increases, as does your share in the appreciation.

However, if the corporation doesn’t do well or goes bankrupt, you can lose some or all of your investment.

Bonds


A bond does not represent ownership in a corporation, but instead the bondholder becomes a creditor of the business.

The difference is that the return the bondholder earns is generally a fixed percentage, such as 5 percent or 7 percent annually. If the bond lasts for 10 years, the investor will receive interest each year for the 10 years, and the principal investment will be returned to at the expiration date.

There are risks involved with bonds, as there is the possibility that the company might fail, and the investor will not receive interest payments or principal investment.

It is important to educate yourself about investing. Learn about the risks and opportunities that CDs, stocks, bonds and other financial investments can provide, and seek the advice of a trusted financial adviser who will take into consideration your goals and risk tolerance.

Janice France-Pettit is a senior vice president and regional manager for Union Bank, overseeing the Simi Valley, San Fernando Valley and Antelope Valley regions. Her column reflects her own opinion and not necessarily that of The Signal. The foregoing article is intended to provide general information about CDs, stocks and bonds and is not considered financial or tax advice from Union Bank. Please consult your financial or tax adviser.

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