Basic Types of Investments — Financial Instruments you should Know

Are you new to investing? Then it is important that you know and understand the basic types of investments that are available to you.

The following financial instruments are the investment options generally available to you in the investments marketplace.

Savings Accounts
Savings accounts are a safe haven to store your emergency funds. They provide easy access to your money and are generally insured. If you or your family’s deposit accounts at one FDIC-insured bank or savings association total $100,000 or less, your funds are fully insured. The chief drawback of such accounts is that interest rates tend to be low since they offer a very high degree of safety.

CDs (Certificates of Deposit)
A CD is a special type of deposit account that typically offers a higher rate of interest than a regular savings account. Just like savings accounts, CDs are also insured up to $100,000. When you purchase a CD, you invest a fixed sum of money for fixed period of time. Usually, the longer the period, higher is the interest rate. There are penalties for early withdrawal.

Money Market Deposit Accounts
These accounts generally earn higher interest than savings accounts. They are very safe and provide easy access to your money. They are also insured by the FDIC. They offer many of the services that checking accounts offer, however, a limit is normally placed on the number of withdrawals or transfers you can make during a given period of time.

Stocks
When you buy stocks, you own a part of the company’s assets. If the company does well, you may receive periodic dividends and/or be able to sell your stock at a profit. If the company does poorly, the stock price may fall and you could lose some or all of the money you invested.

Bonds
A bond is a certificate of debt issued by the government or a company with a promise to pay a specified sum of money at a future date and carries interest at a fixed rate. Bond terms can range from a few months to 30 years. Bonds are tradable instruments and are generally considered safer than stocks because bondholders are paid before stockholders if a company becomes bankrupt. Independent bond-rating agencies rate the likelihood that any given bond will default.

Mutual Funds
A mutual fund is generally a professionally managed pool of money from a group of investors. A mutual fund manager invests your funds in securities, including stocks and bonds, money market instruments or some combination of these, based upon the fund’s investment objectives. By investing in a mutual fund you can diversify, thereby, sharply reducing your risk. Most mutual funds charge fees. You often pay income tax on your profits.

Annuities
Annuities are contracts sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. Earnings cannot be withdrawn without penalty until a specified age and are taxed only at the time of withdrawal. Annuities are relatively safe, low-yielding investments. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it.

 

Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.



This entry was posted in Investing and Financial Planning and tagged , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

CAPTCHA Image

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>