Investing 101: Types
Of Investments
We've already mentioned that there are many ways
to invest your money. Of course, to decide which investment vehicles are
suitable for you, you need to know their characteristics and why they may be
suitable for a particular investing objective.
Bonds
Grouped under the general category called fixed-income
securities, the term bond is commonly used to refer to any securities that
are founded on debt. When you purchase a bond, you are lending out your
money to a company or government. In return, they agree to give
you interest on your money and eventually pay you back the amount you lent
out.
The main attraction of bonds is their relative
safety. If you are buying bonds from a stable government, your investment is
virtually guaranteed, or risk-free. The safety and stability, however, come at
a cost. Because there is little risk, there is little potential return. As a
result, the rate of return on bonds is generally lower than other securities.
Stocks
When you purchase stocks, or equities, as
your advisor might put it, you become a part owner of the business. This
entitles you to vote at the shareholders' meeting and allows you to receive any
profits that the company allocates to its owners. These profits are referred to
as dividends.
While bonds provide a steady stream of income,
stocks are volatile. That is, they fluctuate in value on a daily basis. When
you buy a stock, you aren't guaranteed anything. Many stocks don't even pay
dividends, in which case, the only way that you can make money is if the stock
increases in value - which might not happen.
Compared to bonds, stocks provide relatively
high potential returns. Of course, there is a price for this potential: you
must assume the risk of losing some or all of your investment.
Mutual Funds
A mutual fund is a collection of stocks and
bonds. When you buy a mutual fund, you are pooling your money with a number of
other investors, which enables you (as part of a group) to pay a professional
manager to select specific securities for you. Mutual funds are all set up with
a specific strategy in mind, and their distinct focus can be nearly anything: large
stocks, small stocks, bonds from governments, bonds from companies, stocks and
bonds, stocks in certain industries, stocks in certain countries, etc.
The primary advantage of a mutual fund is that
you can invest your money without the time or the experience that are
often needed to choose a sound investment. Theoretically, you should get a
better return by giving your money to a professional than you would if you were
to choose investments yourself. In reality, there are some aspects about mutual
funds that you should be aware of before choosing them, but we won't discuss
them here.
Alternative Investments: Options,
Futures, FOREX, Gold, Real Estate, Etc.
So, you now know about the two basic securities:
equity and debt, better known as stocks and bonds. While many (if not most)
investments fall into one of these two categories, there are numerous
alternative vehicles, which represent the most complicated types of securities
and investing strategies.
The good news is that you probably don't need to
worry about alternative investments at the start of your investing career. They
are generally high-risk/high-reward securities that are much more speculative
than plain old stocks and bonds. Yes, there is the opportunity for big profits,
but they require some specialized knowledge. So if you don't know what you are
doing, you could get yourself into a lot of trouble. Experts and professionals
generally agree that new investors should focus on building a financial foundation
before speculating.
From www.investopedia.com