Page 462 - Encyclopedia of Business and Finance

eobf_I 7/5/06 3:04 PM Page 439

Investments

Investing in gold may be done in several ways: bul- For the investor, the most important advantage of
lion, coins, shares and funds, and certificates. A number municipal bonds is that they earn interest income, which
of companies specialize in the buying and selling of gold. is tax-free at the federal level. If investors live in the state
in which the bonds are issued, the bonds are usually free
from state and local taxes as well. The downside of tax-free
MONEY MARKET ACCOUNTS
munis is high minimum investment requirements, lower
Money market fund firms operate by combining many yields, and the fact that the issuer can recall them before
small investors’ funds to accumulate the volume of money they mature.
needed to buy money market instruments. Since the
instruments purchased by the fund have differing maturi-
ties, the fund earns interest on a daily basis. Each investor MUTUAL FUNDS
receives a statement, usually monthly, of interest earned Mutual funds are called mutual because a large number of
monthly. The amount earned on an investment varies investors’ provided money to form a pool to be managed
continually as the current interest rates in the money mar- by knowledgeable investment professionals. The price of a
ket rise and fall. share in the mutual fund is determined by the value of the
A minimum deposit is required to open a money fund’s holdings. As the value of the stocks owned by the
market account; $1,000 is typical. Additional funds may fund increases, the share price increases and the investors
be added to one’s investment at any time, and the funds make a profit: If the value of the stocks decreases, the
are completely liquid—one can make withdrawals when- shares are worth less and investors suffer a loss. The price
ever one wishes. of a share in a mutual fund (determined by dividing the
Another important point about this type of invest- net value of the fund’s assets by the number of shares out-
ment: Because of the liquidity of a money market fund, it standing) is usually announced once or twice a day. A
is an ideal way to invest idle cash that might otherwise mutual fund also earns dividends that may be paid
find its way into a low-paying passbook savings account. directly to investors or reinvested to buy additional shares
For example, placing the proceeds from the sale of securi- in the fund.
ties into a money market fund until one has decided upon Therefore, mutual funds can make money for their
one’s next investment venture is a good way of earning investors in three distinct ways:
continuous interest on one’s money.
1. The shareholders receive dividends earned through
the investment that the fund possesses.
MUNICIPAL BONDS
2. If a security in the fund’s portfolio is sold at a profit,
Municipal bonds are issued by local and state governments
a capital gains distribution will be made by the fund
to raise money to provide services and to build schools,
to its shareholders.
roads, water and sewer facilities, and other public works. In
order to meet these expenses, communities borrow money 3. If the value of the fund’s portfolio increases, the
from citizens and institutions by issuing debt obligations value of each share also increases.
known as municipal bonds (munis), which are tax-exempt.
Mutual funds offer an easy way to diversify money,
Among the more popular varieties of municipal control risk, and benefit from professional money man-
bonds available are the following: agement at a reasonable cost.
1. General obligation (GO) bonds. These are backed by
the full faith and credit of the issuing agency. Inter- SAVINGS BONDS
est payments on GO bonds are supported by the The EE bond is a nonnegotiable security against the credit
taxing authority of the state or city government and of the U.S. Treasury—nonnegotiable because once it is
are generally considered the safest form of municipal purchased, it cannot be resold to anyone else, but may be
bond. sold back only to the government at a fixed price. The
2. Revenue bonds. These are usually issued by a govern- bonds may, however, be transferred to someone else.
ment agency or commission that has been charged Series EE bonds are sold at half their face value and
with operating a self-supporting project, such as are available in denominations of $50, $100, $200, $500,
highway or bridge. The money raised through the $1,000, $5,000, and $10,000. Thus savings bonds are
sale of revenue bonds goes to finance the project, available for as little as $25, making them a practical
and the income realized from the completed project choice for the investor with only a minimal amount of
(tolls, for example) is used to pay the interest and money to set aside. It is possible to purchase EE bonds
principal on the bonds. online at TreasuryDirect (http://www.savingsbonds.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 439