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Overview: Investment Types Introduction to Investment Types Video Using the power of the market to help reach financial goals. LAUNCH VIDEO [1.8 MB] >> Asset Classes Before you invest your hard-earned dollars in the stock market, let’s take a moment to review some of the basics of stock market investing. Let’s start with the three main asset classes, beginning with most conservative and moving to most aggressive. CASH - Cash (or "cash equivalents") comprises several types of low-interest, low-risk investment vehicles, which include treasury bills, certificates of deposits (CDs), money market accounts and money market funds. BONDS - A bond is a loan or an IOU in which you, the bond buyer, lend money to the bond issuer. In exchange for borrowing your money (the bond’s price), the bond issuer agrees to pay you a fixed amount of income (the interest) at regular intervals. The bond issuer also agrees to repay your principal in full on a specified date (the bond’s maturity date). Bonds are usually issued by governments or corporations. STOCKS - A stock, which is also referred to as an equity, is a share of ownership in a company. Companies issue stock to raise money. Individuals invest in stocks because they want to make money. There are two ways to make money from stocks. First, the issuing company shares its profits with you in the form of dividends. Second, you sell the stock at a higher price than you paid for it. MUTUAL FUNDS - Mutual funds are popular investment options for millions of investors. A mutual fund is essentially a collection of stocks, bonds or both, depending on the fund’s stated objective. A mutual fund can be made up of any number of different stocks. Some may consist of as few as 20, while other mutual funds may consist of several hundred different stocks. This is important because, when you purchase a mutual fund share, you may have taken the first step to diversifying your portfolio. We will discuss more about diversification in the Investment Strategies section. But for now, remember that you may want to invest in several different types of stocks to help reduce investment risk. Don’t put all your eggs in one basket! Another advantage of mutual funds is that they provide professional portfolio management. You just choose the fund that fits your particular situation and the portfolio manager picks the individual securities in which to invest. Mutual funds are also a cost-effective way to invest in the stock market. If you bought several hundred shares of stock on your own, it would be very expensive. But when you invest in a mutual fund, you share the cost with thousands of other investors, making it a very cost-effective way to invest in a variety of securities. We will explain more about mutual funds later in this section. Keep in mind that diversification does not insure a profit or protect against a loss in a declining market. < BACK NEXT > #40131