Safe Investing for the Small Investor
Savings and Money Markets Accounts
Saving accounts have been considered safe and convenient investment options because they offer minimum risk because deposits are FDIC insured (currently up to $250,000). A money market account is like a savings account except that it offers a higher interest rate and has more restrictions on accessing the funds in the account. Some banks make it easy to save by allowing you to round up your debit card purchases to the next dollar and then transfer the difference to your savings account. Other banks may offer a free savings account when you open a checking account. Exclusively online banks such as Ally Bank can offer more competitive rates with minimum deposit requirements (currently $0 to open an account, no minimum balance, and a six transactions limit to avoid fees). However, to get the premium interest rates, you may have to show an acceptable credit history.
Certificate of Deposits (CDs)
Certificate of Deposits (CDs) are another type of safe investment traditionally offered by banks, credit unions, and other financial institutions, which pay a higher interest rate than savings or money market accounts. You earn a higher interest because you are committing your funds for a set period of time and may be penalized if you withdraw the funds early. There are many different types of CDs to choose from depending upon your investment goals. Online banks such as Discover Bank have higher competitive rates (currently advertising 1.50% for a one year CD). When investing in CDs be sure to ladder the maturity dates so that the impact of changing interest rates will be spread out.
United States Government Bonds
Buying United States government bonds is secure and simple. Basically, all you need to buy a typical savings bond, known as an EE bond, is a checking account, an online account with Treasury Direct, and $25 to get you started. One of the most popular government bonds is the Treasury Inflation Protection Securities (TIPS), which adjusts for inflation and be purchased in $100 increments.
Continue to page 2 to see how small investors can invest in stocks, ETFs and mutual funds.