Understanding Different Types of Investments

When you’re first considering investing those hard earned dollars, it is essential that you understand all the various types of investments there are and how each one works to help you reach your financial goals.

While it may seem that there are just three basic choices, stocks, bonds and cash, each type of investment produces different results at a different rate, often making the decision of how to invest very overwhelming. Much of the decision can be based how aggressive an investor you plan to be and the level of risk you are willing to take.

Often, conservative investments tend to include savings accounts, mutual funds, money market accounts and Treasury bills. These are all long term, low risk places to invest. Those who are a little less conservative may also include some bond investments and small stocks. Aggressive investors will likely invest most of their money in the stock market which offers the opportunity for great returns but also carries the biggest amount of risk. Knowing your investment personality is the first step in making wise investment decisions, and understanding the different types of investments is the second.

In order to help you understand the different types of investments before you approach a broker or advisor, consider these descriptions.

Stocks: Investing in stocks means that you are essentially purchasing a small part of a business. As an equity owner, you will be able to vote as a shareholder and possibly share in the profits of the company. These portions of profits are called dividends. This is one way that you make money with stocks in addition to money made by the value of the stocks increasing. It is important to note however, that not all stocks pay dividends. Stocks are not a steady investment as the value of a stock will change from day to day. There is no guarantee that the value will increase, and there’s always the risk that it will decrease in value. When you invest in stocks it is important to understand the high level of risk involved. On the positive side, a stock can just as easily increase in value quite quickly providing great income opportunities.

Bonds: The essential idea to understand with bonds is that you are basically lending your money to a government or in some cases, a company. The owner of the bond in return for the investment of your money agrees to pay you back the amount of the bond as well as interest earned over the time it is not cashed out. This type of investment is almost risk free and a return on your investment is almost a sure thing as long as the bond is provided by a secure, stable government or company. The disadvantage of this security net is that the return on bonds is generally quite low compared to other typed of investments.

Mutual Funds: Mutual funds tend to be the most common choice for beginning investors as they are generally managed by experienced fund managers, thus eliminating the worry of selecting the right investments. Mutual funds consist of a collection of stocks and bonds that individuals invest in along with other investors. The pooled money is divided across a variety of securities under a predetermined investment strategy. The big plus with mutual funds is that the variety of investments along with the professional management will generally provide good return potential.

While learning as much as possible about investing is always wise, seeking the guidance of a professional is also a good investment strategy.