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Certain Investmant Terminology
What is Principal?

Principal is defined as your capital or the money you have in your pool before you start any investment. Typically, one of your major financial planning goals should be the preservation of principal. That means, regardless of what income return you make on your investments, your goal should always be to make certain you do not lose principal. Although this does not have to be the case in every instance, it is certainly one of the most common investment rules to follow.

Income Defined

Income is defined as the amount of money that your investment pool or principal makes on a daily, monthly, or annual basis. Many different investments, as we will see, will produce different levels of income. For example, in addition to the fact that a stock price will rise, many stocks pay significant dividends, while other stocks do not pay any dividends at all. You may wish to add dividend income to your monthly flow of income to supplement your salary or retirement fund income. If one of your investment goals is dividend income on a monthly or quarterly basis then purchasing these types of stocks regardless of whether the price goes up or down may yield the type of income that you wish to have.

Rate of Return

Although there are several methods by which to measure return, a good way of looking at returns is whether the fund or stock produces what percent of annual return? For example, a ten percent "return" is considered to be a decent return, with the exception of the last few years. In the last few years, a ten percent return was considered a bit below market averages. It is not necessary for investors considering long term investment programs to engage in an analysis of sophisticated market yields or return yields. It is simply wise to understand the rate of return that can be expected form your particular investment. It is a fairly, but common, principle that the higher the risk of the investment, the higher the rate of return or yield. However, this is not always true, and many high-risk investments can produce low returns and often, given certain economic conditions, many low risk investments can produce high returns. Thus, it would be unrealistic to expect a savings account to produce much greater than a three-percent return on an annual basis. Some of your more common conservative investments may not have even the possibility of a high rate of return. Mutual funds, may however, provide these opportunities in limited financial circumstances.

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