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Investment Interest Rates - Things You Should Know About Investment Interest Rates

principle percentage based investor

The best investor is an educated investor. In order to be a successful investor, you must understand the many different types of investment products available and how they work to earn money for you. Knowing the difference between the types of investments and the costs associated with each is a great way to start when you want to become a wise and successful investor.

Something else that you should learn about is investment interest rates. In order to figure out if an investment is lucrative, you need to have a good understanding of how interest rates are determined and also how they are used to calculate accrual of interest. The tricky part of investment interest rates is that they are not always offered in the same way. There are annual percentage rates and annual percentage yield. There are interest percentage rates and other specific ways of talking about interest accrual. In addition there are different compounding periods for specific types of investments and individual products within each type.

First, understand that a compounding rate is the frequency that interest is added to the investment principle. When this happens, monthly, quarterly or even annually, the accrued interest is added to the investment principle and the next interest amount is calculated based upon the new adjusted principle.

Second, there are fixed and variable interest rates. Based on different factors, interest rates are determined and can be adjusted up and down for variable rate investments.

Third, the difference between an annual percentage rate APR and annual percentage yield APY is that APR does not take into account accumulated interest and APY does. Remember when thinking about compounding that interest is added to the principle and then interest is calculated based on a new principle? Well, APR does not take that into consideration and is a calculation based strictly upon the initial principle and the investment interest rates.

Finally, understand that these three major principles apply to many different types of investment opportunities. This means savings accounts, money market accounts, certificates of deposit (CDs) and even stock portfolios are all subject to the same three things. Each will have different investment interest rates and required lengths of investment before maturity. There are many different factors to consider when investing. Not every type of investment is a good option for every investor and you should always talk to a financial advisor to find out what your best options are based on your age, income, health status, etc.

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