Investing to Build Wealth — Types of Investments

Types of Investments

Stocks

Stocks are one investment option. When you buy stock, you become a part owner of a company, and make money through the sale of stock when it has risen in value. Some stocks also pay dividends (distribution of income) to shareholders, usually quarterly.

Historically, the stock market has been a leading way to make money and stay ahead of inflation over time, making it good for long-term investment goals such as retirement.

It is never guaranteed that stock prices will go up or that you will make money on stocks. Before buying stock it is wise to find out about the company’s business, financial performance and management.

Bonds

A bond is a loan you make to a federal or state agency, municipality or corporation. In exchange for the use of your money, the issuer pays a fixed interest rate for a specific number of months or years, until the bond matures (comes due).

The amount of interest paid is based on the issuer’s creditworthiness as well as current interest rate trends. Issuers with good credit are rated higher and pay a lower interest rate. Bonds issued by companies with poor credit are called "junk" bonds. Junk bonds are high-risk investments but they pay more interest, which is why another name for them is high-yield bonds.

Bonds can vary in term length. They can be as short as one year or as long as 30 years. Usually, the longer the term the better interest rate you receive. However, if you sell your bond before the term is up you will lose money. It is best to keep bonds for their full term.

Mutual funds

Mutual funds are portfolios of stocks, bonds and other securities in which the public may purchase shares. Each investor shares in the fund’s gains, losses and expenses.

With a mutual fund, your money goes in a pool with other investors to create a large portfolio that is overseen by a fund manager. Most funds buy a variety of investments like stocks, bonds, or other securities.

To invest in a mutual fund, an investor buys shares of the fund and becomes a shareholder. That fund makes money two ways: by earning dividends or interest on its investments and by selling investments that have grown in price. The fund then pays out its profits to the shareholders.

A word about risk

When making investments, it’s important to understand not only the potential returns, but also the risks involved.

We would all like to earn the highest possible return on our money. However, as the potential return goes higher, so does the risk that you might lose money.

• Bank savings accounts and CDs that are insured by the FDIC offer a smaller return than other types of investments because they are safer.
• Stocks, bonds and mutual funds have historically provided a higher return over time, but they are not insured so you risk that these investments might go down in value.

For more information about investing in stocks and bonds you can visit the U.S. Securities and Exchange Commission Web site.