There are three major types, or asset classes, of investments: cash and cash-equivalents, bonds, and stocks. These classes are generally discussed in terms of their risk, their return, (the amount they earn, which can be positive or negative), and the time horizon for the investment.
Cash and cash-equivalents
Cash and cash-equivalents are investments that can be readily turned into cash. Some examples are checking and savings accounts, bank certificate of deposits (CDs), and money market funds. These are also referred to as liquid investments.
Bonds are securities issued by governments or corporations when they need to raise funds, or capital. A bond has a maturity date, which is the date when the issuer must repay the face value of the bond to the investor. The issuer pays interest, usually at a fixed rate, during the time the bond is outstanding. Sometimes bonds are referred to as fixed income investments.
Stocks are securities that represent ownership of a company. There are no contractual payments like there are for bonds. Return from stocks comes from dividend payments and/or the gain or loss in stock price. Some stocks pay dividends, providing an income stream; others provide return from gain or loss in value, and some have a combination of both.
A mutual fund is an investment option that pools your money with other investors and is managed by investment professionals. These money managers use the pool of money to buy individual securities such as stocks, bonds, and cash investments. By purchasing many securities and investments in a range of asset classes, they are able to minimize the risk in the fund. Rather than owning the securities directly, you and the other mutual fund investors own shares in the mutual fund. You make money if the mutual fund shares grow in value or if the fund distributes profits to the investors.
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