When exploring the world of investments, it’s important to gain a broad perspective of the various types for a clear understanding of how each of them can work towards achieving your objectives. Each has its own investment characteristics which, when applied individually, may not be appropriate for your financial profile; however, when they are strategically combined in a portfolio, they can work in concert to meet your investment objectives within your risk parameters. It is, therefore, important to consider all investments in light of your specific objectives and risk tolerance.
Investments for Growth Stocks:
You can own a piece of a company on the rise. Companies raise capital for their own investment by issuing shares of stock to the public. After issue, the shares are bought and sold on the open market through stock exchanges. When investors perceive that a company’s future earnings prospects are favorable, they will bid up the price of its shares. Stock prices generally rise in a growing economy, and decline in a shrinking economy. Historically, stock prices have always trended upwards, but the market is always subject to downward swings.
Equity Mutual Funds:
Rather than trying to pinpoint the next Google or Apple, you can leave it to the professionals to identify companies with the greatest potential and manage a whole portfolio of stocks on your behalf. This provides you with immediate diversification which is essential to minimizing your risk. You can achieve greater diversification by investing in mutual funds that focus on different industry segments or global regions.
One of the easiest and least expensive ways to participate in the growth of the markets is to invest in index funds, which are similar to mutual funds in that they consist of a big basket of stocks. Unlike mutual funds, they are not actively managed; they simply track the movement of various stock indexes. So, if you believe that an index, such as the S&P 500, will rise over the long term, you can simply invest in the index.
Investments for Income
The U.S. government borrows money in order to finance its debt and expenditures. When you purchase a U.S. Treasury note from the government, you are, in essence, loaning it money for which it pays you a fixed rate of interest. Because these notes are backed by the full faith and credit of the U.S. government, they are considered to be the safest of investments.
Corporate Bonds: The other way companies raise capital is by borrowing money from investors. A company can sell bonds to individuals, and companies can also raise capital by issuing debt securities. An individual who owns a corporate bond is a bondholder who receives interest payments from the company. Bonds are typically issued in $1000 increments are have a fixed rate of interest attached to it. Because bonds trade actively in the open market their prices can fluctuate, however, if held to maturity, the bondholder receives the full face amount of the bond.
Bond mutual funds:
As with stocks, bonds are bundled together in portfolios which are actively managed to produce income and capital appreciation for investors. Owning a portfolio of bonds is less risky for smaller investors because it is diversified and, it is more liquid.