Investment Types

There are a lot of different investment options out there and understanding them all can be tricky. We will give you an overview of several options you can pursue to help you make the best choice.

Mututal Funds

A mutual fund combines the money of small investors into a single fund. That fund is then managed by a financial institution or brokerage firm, such as Charles Schwab, Fidelity, or Vanguard. The financial institution is then responsible for purchasing stocks, bonds, and other securities on the fund’s behalf.

Benefits of a mutual fund are diversification and liquidity. By contributing to a mutual fund, you are given a small stake in the investments of the other investors. This allows you to have a claim in a wide variety of investments without necessarily having to purchase them yourself. In addition, the cost per transaction is typically lower than it would be on an individual level.

And just like stocks, you are able to request your shares be converted to cash at your own discretion.

There are three main types of mutual funds – equity, fixed-income, and money market. Equity funds are basically mutual funds that invest in stocks. Stock funds are chosen based on company size, investment patterns, and geographic location.

You can invest in a mutual fund the same way you would most other forms of investment. You can go to a brokerage firm such as Charles Schwab, Fidelity or Vanguard. You can also consult independent stock brokers and financial advisers who can set one up for you. Many banks also offer mutual funds so talk to a financial advisor at your local institution.

Money Market

A mutual fund combines the money of small investors into a single fund. That fund is then managed by a financial institution or brokerage firm, such as Charles Schwab, Fidelity, or Vanguard. The financial institution is then responsible for purchasing stocks, bonds, and other securities on the fund’s behalf.

Benefits of a mutual fund are diversification and liquidity. By contributing to a mutual fund, you are given a small stake in the investments of the other investors. This allows you to have a claim in a wide variety of investments without necessarily having to purchase them yourself. In addition, the cost per transaction is typically lower than it would be on an individual level.

And just like stocks, you are able to request your shares be converted to cash at your own discretion.

There are three main types of mutual funds – equity, fixed-income, and money market. Equity funds are basically mutual funds that invest in stocks. Stock funds are chosen based on company size, investment patterns, and geographic location.

You can invest in a mutual fund the same way you would most other forms of investment. You can go to a brokerage firm such as Charles Schwab, Fidelity or Vanguard. You can also consult independent stock brokers and financial advisers who can set one up for you. Many banks also offer mutual funds so talk to a financial advisor at your local institution.

Bonds

Simply speaking, a bond is a loan. However, the conventional roles of borrowing are reversed, and you become the lender as opposed to being the borrower. Bonds are typically issued by the government, state, local municipality, business, or corporation in an attempt to raise funds for various expenditures.

There are several benefits of bond buying. You can experience higher yields which is great during periods of declining interest rates. You also have security. When a company is liquidated, as a bond holder, you can often be given priority over a stockholder. This makes it easier to receive payment. If you sell a bond before it matures you are often able to get more or less than your investment due to fluctuating values. Interest on bonds is usually exempt from state and local taxation, as well as federal with some cases. Bonds are also great because they are fairly low-risk investments.

There are several different kinds of bonds you can choose from:

Much like municipal bonds, corporate bonds are used to finance a company’s financial endeavors
and responsibilities such as purchasing new equipment, buying back stock, paying shareholders,
refinancing debt, etc. Companies categorize their bonds based on the time it will take for the
company to pay back the principal.

These “maturities” can either be short term (less than three years), medium term (four to ten years), or
long term (more than ten years). While long term bonds often offer higher interest rates, there are also
high risks.
Zero-coupon bonds are bonds that are purchased at a significant discount from their face value. As a
result, these types of bonds do not accrue interest during the life of the bond. However, when the
bond matures, the investor will receive the full “face value” of the bond.

Zero-coupon bonds allow an investor who might not have a lot of money to put up front right away the
ability to invest for the future, and allow that money to grow over time. Many zero-coupon bonds are
long term, often having maturity dates ranging fifteen years or more.
Also known as T-Bonds, treasury bonds are fixed interest bonds issued by the U.S. government.
Normally, treasury bonds have a maturity date of at least ten years and interest payments are paid
semi-annually. Treasury bonds are also subject to federal taxes and have a minimum investment of
$1,000.
Government bonds are debt securities issued to support government spending. They are often
referred to as “risk-free” bonds as a result of faith in the government’s ability to satisfy the debt.
However, there have been instances in which the government has had to default on a loan.

Most bonds can be bought through a brokerage firm. You may be required to have a minimum deposit if you go this route. Other financial institutions may provide ways of transacting government securities so check with your local office. You can also purchase government bonds through a government agency. In the U.S., you can buy government bonds online from TreasuryDirect which allows you to bypass a broker.

CD's

A CD is a type of savings account that offers a high fixed interest rate for a certain length of time. It is only after that time (i.e. 6 months, one year, etc.) that you will be able to access your funds. If you choose to withdraw money before your CD has “matured” you will incur a sizeable fee. CDs are a great way to save and earn money. There are many different types of CD’s that come with their own unique benefits.

First you will want to choose the term of your CD. This can be varying lengths usually 1, 3 or 5 years. Then you will want to decide which type of CD you want to invest in. Lastly, you will want to check with different financial institutions to see which rates are available and find the one that works for you. Remember to seek out online institutions as well for more competitive rates.

Since online financial institutions like Ally and Barclay’s often incur lower overhead costs than traditional banks, they are able to offer higher interest rates on their financial products and services. Because CDs do not require traditional maintenance, it is not unusual to purchase a CD from an online financial institution.
While most CDs are purchased through financial institutions, brokered CDs can only be purchased through a financial advisor or licensed broker. As a result, they tend to offer a higher interest rate than a traditional CD. However, brokered CDs are often subject to fees, which can add up over time.
With CDs, you must commit to not touching your money for a fixed period of time. In most cases, people who put their money into CDs wind up incurring huge penalties when they withdraw their money ahead of schedule. No-penalty CDs offer more flexibility and allow you to have more access to your funds in exchange for a lower interest rate.
A liquid CD is the middle ground between a traditional CD and a no-penalty CD. Liquid CDs offer competitive interest rates and allow you to make a certain number of withdrawals without a penalty. After the maximum number of withdrawals is reached, you will incur a fee. Although the interest rates of liquid-CDs are lower than what a financial institution would pay, they are higher than a savings account.
Callable CDs are traditional CDs that a bank or financial institution reserves the right to terminate, or “call back”, before the CD has had time to mature. Since people who purchase these CDs run the risk of not earning interest for the full term, the interest rates on these CDs are typically higher.

Stocks

A stock is a share in the ownership of a company. Stocks represent a holding on the assets or earnings of a company. The more company stock you acquire, the more significant your stake in the company becomes. When you own stock, you become a “shareholder” and have an extremely small claim to all the company owns.

While stocks, and the ownership they represent, don’t necessarily give you a say in the daily operation of a company, your stake in the company does grant you the privilege of being able to vote on board members and other various issues the company may face. In addition, when a company issues profits to shareholders, you will receive a share.

There are two ways to make money with stocks – appreciation and dividends. When a stock “appreciates” in value, the stock is worth more than what you had originally paid for it. Thus, if you were so inclined, you could sell your stock for a profit.

The other method by which stocks can be lucrative are through dividends. Dividends are payments made to shareholders by a company that reflect the company’s earnings.

Dividends are often paid every three months (quarterly) and allow investors a steady return so they need not be concerned with the stock’s price in an ever changing market. However, companies are not required to pay dividends. This is something to consider when purchasing stock.

There are two types of stocks – common stock, and preferred stock.

Most stocks are issued as common stock. Common stocks indicate partial ownership of a company and a claim to dividends. Investors are allowed one vote per share when it comes time to elect board members. Common stocks are usually high risk – a company can go bankrupt leaving the common shareholders the last to receive money.
With preferred stocks, investors are often guaranteed a fixed dividend. In the event that a company files for bankruptcy, preferred shareholders are often paid before common shareholders. However, most preferred stocks are callable and can be purchased back by the company at any time for any reason.

Stocks are most often purchased through stock brokers who are licensed to purchase securities on your behalf. Stock brokers can be found by doing a simple Google search for brokers in your area. They can also be found at brokerage firms such as Charles Schwab or Fidelity. There are four different kinds of stock brokers ranging from simple order-takers to full-service brokers.
Online stock brokers are order takers – meaning they follow an investor’s instructions regarding how they would like to purchase or sell securities. The interaction between an investor and an online broker is extremely limited to telephone calls and electronic communication. Since online brokers rarely provide investment advice, reports, and forecasts, the cost to buy and sell stock is pretty low – and is often calculated on a “per transaction” basis. Online brokerage firms include E-Trade and ShareBuilder. Online brokering can be risky since you are not getting advice from a financial adviser. However, many online brokerages offer advising services at an extra cost.
Discount brokers are similar to online brokers in that they provide extremely limited assistance. However, online brokers are likely to be more modest when it comes to “per transaction” costs and often are willing to provide some financial advice for a fee.
Full service stock brokers are more like traditional stock brokers who take into account your current financial situation, goals, and factors that will affect your investment (i.e. marital status, assets, age, income, etc.). Financial planners will also work with you to establish financial goals (i.e. retirement planning) and budgets. While these types of brokers tend to be more expensive, they are worth the money.
Money managers are full-service stock brokers who take full discretion over large portfolios of money. These financial services sometimes act independent of client interaction but act in the client’s best financial interest. Money managers are extremely skilled when it comes to finance and therefore charge hefty fees for their services. Minimum holdings for accounts usually range upwards of $100K.

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