Investment Avenues & Their Characteristics
Original post by Linsay Evans of Demand Media
Choosing how and where to invest your money can be a daunting task. Should you take risks or play it safe? Both time and goals play important roles in investment decisions; investors in their 20s and 30s may have very different goals than those nearing retirement. Whether you're saving to buy a home, to fund a college education, to pad your retirement or simply trying to grow your personal wealth, a variety of avenues offer investment options.
Bonds are among the least-risky investments. Part of a group of investments known as fixed-income securities, bonds essentially represent a loan to a government or company that, in return, agree to pay you a fixed interest rate, or coupon, at regular intervals over the life of the loan before repaying you the initial purchase price, or face value, when the bond reaches maturity. Bonds represent little to no risk, especially when issued by a stable government or corporation, but the trade-off is that they tend to pay less than other, more risky, investments. Investors with shorter time horizons, such as retirees or those who need the investment funds back within a certain time frame, should consider bonds.
Stocks present more risk than bonds, but also provide the opportunity for greater gain. When you purchase stocks, also called shares or equity, you're essentially buying a piece of a company's assets and earnings. Stock owners are also known as shareholders, as they share in the company's earnings and have certain voting rights, which are usually limited to board of director elections. When the company makes money, stockholders do too, either by receiving payments in the form of dividends or through market appreciation; if a company loses money, so do stockholders. However, greater risk can lead to greater reward. According to Investopedia, long-term stock investment has an average, historical return of 10 to 12 percent. Investors in their 20s and 30s or other investors with a long time horizon should consider stocks.
Mutual funds allow investors to join groups of other investors to combine their resources and buy collections of stocks or bonds. Mutual funds are managed by finance professionals, which removes the need for investors to have extensive investment experience and to micromanage their own portfolios. Mutual funds spread out investors' risk, so if one stock performs poorly, there are other, better-performing stocks to compensate. Disadvantages of mutual funds include their cost; management is not free and fees can be high and hidden, and some security sales result in capital gains taxes. Mutual funds' risk and time horizon varies by product.
Other investment avenues include the foreign exchange market or Forex. This quick-moving market is based on the purchase and sale of foreign currencies. American depository receipt stocks allow investors to purchase stocks in foreign companies through a buffer zone of U.S. banks, which buy the shares and release them onto the New York Stock Exchange (NYSE) or NASDAQ. Mortgage backed securities are issued by government-backed entities such as Freddie Mac; funds are used by small banks to support mortgage lending. Mortgage backed securities generally offer low risk and moderate returns.
- CNN Money: Money 101 Investing in Stocks
- Ohio State University; Investing in Bonds; Ruth Anne Mears; January 2001
About the Author
Based in Phoenix, Linsay Evans has been writing professionally since 2004. Her experience lies in nonprofit grant writing and in community relations management. Her research has been published in "LIBRES" and the "University of Washington Policy Journal." Evans holds a Master of Library and Information Science and a Master of Arts in anthropology.