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Basic Investing Tools

Smart investing starts with understanding the basics, such as:

Stocks
Stock is the legal capital of a corporation divided into shares. When you invest in stock you own a part of the business, helping it to grow and expand. Stockholders have voting rights in the companies in which they own and come together annually with other shareholders to elect a board of directors to manage their company. Most individual stockholders own a very small percentage of a company’s assets. However, some very large stockholders can exert a great degree of control over a company’s policies and management.

Investors in common stock can earn money from their investment in two ways: through dividends and through capital gains. When a company makes a profit, it may divide part of the profit among the shareholders in the form of dividends. If the company is growing, it may use the profits to fund expansion instead of distributing more of the profit to shareholders. Or it may decide to issue dividends in the form of additional shares of stock instead of cash payments. When paid, dividends are generally distributed to shareholders four times a year.

Some firms regularly distribute high dividends to their shareholders. These companies tend to be more established, and their growth has stabilized at a certain level. They also have fairly predictable expenses and income. Other firms may pay smaller dividends or no dividend at all, but they offer the potential for future growth. Young firms in promising industries might fall into this category. Whether you choose to invest for income or potential growth will depend on your individual investment goals.

All stock investors hope their company will grow and become more profitable, increasing the value of their stock. If earnings continue to increase so should dividends. This enables them to sell their shares for a profit and realize capital gains from their investment. Stockholders can sell their shares at any time at the current market value. The price can fluctuate daily depending on such factors as general economic conditions and the earnings and future prospects of the company.

Most stock is known as common stock. Preferred stock is a special form of stock, not issued by all corporations. Preferred stockholders receive preference over the common stockholders. Should a bankruptcy occur, preferred stockholders receive any assets prior to the common stockholders.

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Mutual Funds
In today’s complex financial marketplace, mutual funds offer investors a simple, convenient way to invest. Mutual funds are investment pools that may invest in stocks, bonds, and other securities. They can take many forms, but each allows you and investors with similar objectives to pool your capital and achieve goals as a group that you might not be able to achieve individually.

One of the most valuable features of mutual fund investing is professional management. Each fund is under the direction of a manager or management team that makes specific buy and sell decisions for all securities in the portfolio. The portfolio managers draw upon their experience and the fund family’s research to make sound investment decisions.

Diversification is an important investment goal you can achieve by investing in mutual funds. It reduces your dependence on the success or failure of any one security. Investors who don’t have large sums to invest can build a diversified portfolio with mutual funds more easily than by investing in individual stocks and bonds. You can achieve even wider diversification by selecting several mutual funds with varying investment objectives or styles of management.

Mutual funds also increase your flexibility. Most funds offer discounts, called rights of accumulation, for larger amounts, allowing investors to purchase shares at a reduced rate. Many offer systematic investment plans, allowing you to invest a specific amount in regular installments over a period of time, rather than investing a large amount of money all at once. You may also reinvest dividends and capital gains into the fund. And many funds have systematic withdrawal features, which allow you to designate an amount you wish to receive from your fund on a regular basis.

There are four basic types of mutual funds: stock, bond, hybrid (which invest in a mix of stocks and bonds), and money market. Stock, bond and hybrid funds are generally considered long-term funds. Money market funds are referred to as short-term funds because they invest in securities that generally mature in one year or less.

In recent years, the number of mutual funds with different investment objectives has grown. As a result, it is also useful to categorize mutual funds by their investment objectives, including growth funds, aggressive growth funds, growth and income funds, balanced funds, international funds, high-yield bond funds, and municipal bond funds. Your financial advisor can help you evaluate the choices available and select the funds that are most appropriate for your situation.

For more information on any mutual fund, including charges and expenses, obtain a prospectus from your financial advisor. Read carefully before you invest or send money.

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Money Markets
Money market funds are one type of mutual fund that provides investors with immediate availability of their money, while offering a better return than some alternatives. These funds hold large quantities of short-term securities, some of which mature daily. This allows the funds to keep their share price stable, with slight changes from day to day.

Money market funds are good as short-term investments or in situations where you may want to preserve the value of your investment while earning some income. Money market funds are a useful part of any diversified portfolio, giving you liquidity and yield.

In addition to competitive yields and safety, money market accounts may also offer cash management services such as check writing and automated sweeping of cash balances to and from brokerage accounts.

An investment in money market mutual funds is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although the money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Funds. Money market funds are sold by prospectus only. The prospectus contains complete details about each fund, including risk, charges, expenses, and should be read carefully before you invest or send money.

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Municipal Bonds
Municipal bonds are among the few tax-advantaged investments available today. They are debt securities issued by state and local governments or one of their components, such as water and sewer systems, local schools or institutions of higher education. Many nonprofit entities like hospitals, museums, and charitable organizations also benefit from municipal bonds.

The interest received from most municipal bonds is exempt from federal income taxes (although it may be taxable if you are subject to the Alternative Minimum Tax) and, in most cases, from state income taxes if an investor purchases bonds issued in his or her state of residence. Tax-free municipal bonds also give you the advantage of fixed income as well as a choice of maturities, and are generally considered to be one of the more conservative investments.

When you purchase a municipal bond, you agree to loan your money for a specified period of time in exchange for a predetermined rate of interest, usually paid twice a year. You receive your principal investment back when the bonds mature. Bond maturity terms can range from three months to 30 years.

Most bonds carry a credit rating based on the risk associated with the issuer and its degree of credit worthiness. Bonds rated between Aaa to Baa by Moody's Investors Service or AAA to BBB by Standard & Poor's are considered investment grade by banks and conservative investors. Non-rated bonds and those rated below investment grade are considered speculative because they have a higher risk of defaulting.

Some bonds, known as insured bonds, carry insurance which guarantees payment of principal and interest when due to the investor if the bond issuer defaults.

Most municipal bonds are secured in one of two ways. General obligation bonds are secured by the full faith and credit of the issuer, usually a state or local government, and its taxing power. Revenue bonds are secured by a pledge of income derived from tolls, mortgages, charges, or rents paid by users of the facility built with the bond proceeds.

Municipal bonds can be used in a variety of structures to enhance your tax situation. Consult your Financial Advisor to evaluate the appropriate use of municipal bonds in your portfolio.

Any comments regarding tax implications are informational only; BB&T Scott & Stringfellow does not provide tax or legal advice. As always, you should consult your tax or legal advisor.

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Annuities
An annuity is a contract between you and an insurance company that guarantees the insurance company will pay you an income in the future in exchange for your investment today. That's the simple definition. But it's not the whole story.

There are two basic types of annuities: Immediate and Deferred. Immediate annuities are designed to provide income for either a specified period of time, the duration of your life, or a combination of the two. These products begin distributing income within one year of purchase. Deferred annuities have an accumulation phase, during which earnings will accumulate on a tax-deferred basis. You and your Financial Advisor will determine how your money is invested, with most deferred annuities offering both fixed and variable investment options. Because of the wide array of choices, you can have a diversified portfolio tailored to your needs. Within these two categories, the annuity may be either fixed or variable. Fixed annuities offer a guaranteed rate of return. This guarantee is backed by the financial strength of the issuing company for the length of time specified at purchase. Variable annuities allow the investor to choose from many different disciplines, ranging from aggressive stock subaccounts to more conservative bond subaccounts. Subaccounts are similar in concept to mutual funds in that your money is professionally managed and diversified within specific objectives.

Annuities also offer other features. Because of the tax-deferred treatment annuities enjoy, you are able to switch among investment choices tax-free. Guaranteed death benefits are standard and ensure that, should something untimely happen to you, your beneficiaries would receive at least the amount you invested in the contract (adjusted for withdrawals) regardless of market performance. Also, many contracts offer minimum income benefits designed to protect your retirement income stream in the event that your investments perform poorly.

Annuities are tax-deferred investments, so you don’t pay taxes on your earnings until you withdraw the funds. As a result, they can effectively accelerate the growth of your capital. Even though you pay taxes when the money is paid out, years of compounded interest on money that would have gone to taxes for another investment can add up to greater value overall.

Any comments regarding tax implications are informational only; BB&T Scott & Stringfellow does not provide tax or legal advice. Annuities are available through insurance subsidiaries and other underwriters. Not available in all states. Fees are charged to pay for death benefits guaranteed by the issuing insurance company. Variable annuities are long-term investments suitable for retirement funding. They are not short-term, liquid investments. Withdrawals from an annuity before age 59 ½ may incur a 10% penalty. Early redemptions may also result in the payment of surrender charges or contingent deferred sales loads. Therefore, the investor may receive less than the original invested amount. Any guarantees depend on the claims-paying ability of the issuing company. Annuities are sold by prospectus only. Consider the investment objectives, risks, charges and expenses of the variable annuity carefully before investing. For more information (including charges and expenses and taxes), and to obtain a prospectus, contact your financial advisor. The prospectus contains more complete information about the variable annuity being offered. Please read the prospectus carefully before investing. Investments in annuities are not a deposit, not insured by the FDIC or any federal government agency, not bank guaranteed, and may go down in value.

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