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Investments are typically fall into three categories: Cash, Stocks (Equities), Bonds. Other less liquid investments include real estate, collectibles and precious metals. These assets typically provide less diversification on their own, but can help diversify an overall portfolio.
Assets are categorized to help distinguish their use and risk. Some assets serve to produce income, some to grow, and others for short term needs. Each has its own unique characteristics:
Equities (Stock)
When you invest in stocks, you're buying a share of ownership in a corporation and become a shareholder. Companies sell shares of stock to raise money for start-up or growth.
There are two types of stock: common stock and preferred stock. Typically, both of these are further divided into size of the company's capitalization (Small, Mid-cap, Large), whether they are US based or international and what stage they are in (Growth, Value or a Blend)
With common stock, shareholders have a percentage of ownership. For example, if you own one share of common stock in a company that has 100 shares, you own 1 percent of the company. Common stock shareholders also have the right to vote on issues affecting the company.
Preferred stock usually does not offer shareholders voting rights, but they are generally entitled to dividends (the company's profits distributed in cash). Preferred stockholders typically receive dividends at specified times and in predetermined amounts; common stockholders may or may not receive dividends based on company profits.
Investment returns and risks for both types of stocks vary, depending on factors such as the economy, political scene, the company's performance and other stock market factors.
Bonds
When you buy bonds, you loan money to the government or to a company. Bonds are issued for a set period of time during which interest payments are made to the bondholder. The amount of these payments depends on the interest rate established by the issuer of the bond (the government or company) when the bond is issued. This is called a coupon rate. Coupon rates can be fixed or variable. At the end of the set period of time (called the maturity date), the bond issuer is required to repay the par or face value of the bond (the original loan amount).
Bonds are considered a more stable investment than stocks because they usually provide a steady flow of income. But because they're more stable, their long-term return is typically less than that of stocks. Bonds, however, can sometimes outperform a stock's rate of return, depending on the particular stock.
Keep in mind that bonds are subject to a number of investment risks including credit risk, repayment risk and interest rate risk.
Cash Equivalents
Cash equivalent investments protect your original investment while providing access to your money. This category generally includes bank and savings accounts, money market funds, CDs, treasury bills, savings bonds, fixed annuities and the cash value of life insurance.
These types of investments generally deliver a more stable rate of return. However, the rate of return (after taxes are paid) is often so low that it doesn't keep pace with inflation. A passbook savings account, money market fund or CD may give you quick access to your cash and may provide more short-term security, but they're not designed for long-term investment goals like retirement.
Any of the above options can be combined into a mutual fund, which is defined as a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors. More recently, Electronically Traded Funds (ETFs) have been introduced, which act like a fund but trade like a stock. For more information on all types of investment, contact us.
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