From real estate to bonds to money market funds, you can invest your money in various ways.
Investment types can vary greatly, but the most common investments are stocks, bonds, mutual funds,cash equivalents and alternative investments. If you are considering investing your money, read on to learn about the different investment opportunities available.
In basic terms, a stock represents a share of legal ownership in a business. Stocks, sometimes called equities, entitle you to a portion of the business’s profits and assets. There are two primary types of stock: common and preferred.
A common stock entitles you to a portion of the corporation’s earnings and losses. It also typically gives you a vote at shareholder meetings. Because of common stock’s potential for greater returns, this type of investment is more popular among seasoned investors and is generally what people refer to when they are talking about stock.
A preferred stock does not typically entitle you to appreciation in value or voting rights. However, owning a preferred stock does guarantee you the right to receiving a specific dividend payment at a predetermined time. Should the company go bankrupt and liquidate, preferred stockholders are paid off before common shareholders, thus making preferred stocks a less risky investment.
A bond is a loan you make to a company or institution. In return, that organization promises to pay you back with interest. Corporations and governments utilize bonds to fund things like projects and the costs of operation and expansion.
Compared to common stocks, bonds are a low-risk investment. Buying a stock from a stable entity virtually guarantees your investment. However, due to their low risk, bonds also come with a lower potential for return. Because you can generally predict the amount of money you will receive from your bond, this type of investment is often called a “fixed-income” investment. Issued by governments, cities, businesses, and international bodies, bonds come in many different forms. Review common types of bonds below.
U.S. Treasury securities are issued by the federal government and guaranteed by a “full faith and credit” guarantee. This type off bond is a very safe investment due to this guarantee. The federal government also issues U.S. savings bonds, and this bond is backed by the same guarantee as U.S. Treasury securities. However, unlike Treasury Securities, U.S. Savings bonds can be purchased for a very small investment. Municipal bonds are issued by local government entities, including states, counties and cities.
Corporate bonds are a form of debt financing issued by businesses to raise funding for things like ongoing operations and expansions. Asset-backed securities are issued by financial institutions, and are collateralized by assets like loans, credit card debt or leases. Mortgage-backed securities are similar to asset-backed securities but backed by mortgages instead of other assets.
A mutual fund is a pool of money contributed by many individual investors and organizations to invest in collection of stocks, bonds, and other securities known as a portfolio. A professional portfolio or fund manager, who is responsible for buying and selling securities within the portfolio to maximize capital gains and/or income for the shareholders, handles mutual funds.
A mutual fund can be a wise type of investment if you are an individual investor with little time or experience to oversee investments, since these types of investments are managed by a seasoned, professional fund manager. The fund manager devotes his or her to monitoring portfolios and market conditions to make profitable investment decisions for your money.
Mutual funds can be broken down into three basic categories.
Cash equivalents are short-term investments that can be easily converted into known amounts of cash. Cash equivalents typically come with a very stable, but very low, return rate. See common examples of cash equivalents below.
Alternative investments can be broadly defined as assets that fall outside of traditional investments like stocks, bonds and cash equivalents. Alternative investments encompass a wide range of investment strategies, including, but not limited to, the methods listed below.