Big Brood

When looking to grow our cash, I keep running across a few different types of investments mentioned in many places. In this post, I want to talk about the basic categories of investments that I will eventually write about a lot more. The major types of investments that I hear about are stocks, bonds and mutual funds.

First I’d like to mention that JD over at GetRichSlowly is running a series of basics for Financial Literacy month. This article talks about diversification and how it can help you when you invest.
Stocks

When you buy a stock, sometimes known as shares or equity, you become a part-owner of the business that you buy shares from. They usually use the money that you give them to fund growth or other initiatives in the company that they think will make the company more profitable. In return for you putting your money into growing the business, the company will often give you a share of their profits, known as a dividend. A dividend is usually going to be between $0.00 and $3.00 per share. Here is an example table of dividends given for stocks on the Dow Jones Industrial Average. Investors may also make money from stocks by trading them on the secondary markets to other investors who are either interested in getting the dividends out of the stock or who are interested in buying the stocks low and selling them for a profit later. Later may range anywhere from minutes after purchase to decades, depending on the investors strategy for profiting.

Bonds

Bonds allow you to be a lender to a company. You give the company an amount of money for a certain period of time and they in term agree to pay you interest on that money. So, you give them money, they give you an IOU and pay you interest throughout the life of the loan. There are many types of bonds, including corporate bonds, treasury bonds (loans to the federal government) and municipal bonds

Mutual Funds

Bonds are generally safe investments in that unless the company goes out of business, you should get back all of the money you put in, plus interest. Stocks are generally more risky because you are taking on the risk of owning a business. If the business makes bad decisions, it may make no profit which means no dividend for you and also no one else will want to buy your stocks on the secondary market unless you lower the price (which may fall below what you payed for it.)

However, stocks are more likely (over the long run) to give you a greater return on investment than bonds. In general in investing, the amount of risk you take on determines your possible profit. Riskier means possibly more profitable.

Mutual funds are an attempt to have the best of both worlds sometimes called diversification. Mutual funds can be a collection of stocks or bonds or both. In this way, you can mix your risk vs. reward to get a little less of both and hopefully come out on top vs. picking your own stocks.

These are some basic investments types. I hope to go into much more detail about each of these as I investigate them.