By: Anabelle Martin
There are three main types of investments: stocks, bonds, and term deposits. These three are very different from each other, but it’s important to understand how they work so that you can choose the right one for you.
Stocks
A stock is a type of financial instrument that a company issues to raise capital. In return, investors receive ownership rights to a certain percentage of the company. These rights include voting at shareholder meetings and a partial stake in the company.
Although these financial instruments come with their own set of risks, they can also help you create wealth. The key is to diversify your portfolio to lessen the risks. There are several types of stocks to choose from. However, knowing what each one is and what they do is important.
The most common type of investment is known as common stock. This is the type that most people invest in, and it entitles its owners to a portion of the company’s profits.
Buying common stock gives you a chance to enjoy unlimited upside potential. You also have voting rights for the company’s board of directors. While this is the most common type of stock, there are many other forms to consider.
Bonds
When you invest in bonds, you’re lending money to an entity, such as a corporation or a government. The issuer promises to pay you interest over the life of the bond. They will also repay you the face value of the bond when the bond matures.
Bonds offer a higher rate of return than cash equivalent investments. They are generally tax sheltered, though you may be subject to regular income taxes on the funds that you receive. These types of investments also provide a predictable income stream, which can help you protect your capital.
You can choose to buy either a short-term or long-term bond. The longer the duration, the more risk you will incur. If you choose to sell the bond before maturity, you’ll have less buying power.
The interest payments you receive on a bond depend on the coupon rate set by the issuer. This rate can be fixed or variable. Some of the risks of investing in bonds are credit and inflation risk.
Lending money
Lending money is not for the faint of heart but it can help you achieve your financial goals. You can do so by opening a savings account or putting some cash in the bank. The key is to find the best deals and stick to them. This is where the savviest banks and credit unions come in. A slick way to do this is by putting some money in a money market account. For the most part, these types of accounts are liquid and easy to manage.
It’s also a good idea to consider your options before committing to one particular type of investment. There are many choices out there, but some of them are better than others. For example, there are a plethora of online brokers, each of which is worth a look. Using a broker can make you much more confident in your decision making and your finances.
Term deposits
Term deposits are a great way to earn a guaranteed return on your investments. This type of investment is offered by many banks and credit unions. Those who invest in this type of account typically receive a higher interest rate than those who save in other types of accounts.
Unlike other types of investments, term deposits are secure and insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. In addition, these funds are also guaranteed by the Deposit Guarantee Fund.
These accounts can come in varying terms, from short to long. Most deposits are reinvestable, meaning they can be redeemed for a different investment at a later date. Some types of term deposits allow monthly interest payments.
One of the most common types of term deposits is the certificate of deposit, or CD. This type of account typically pays higher rates for larger amounts of money. The bank will hold the money for a set amount of time, typically for six months or more.
