Cash and Stocks and Bonds … Oh My
There are many, many kinds of investments — but don’t freak out. It’s a good thing. It means there are many, many ways to put your money to work. Learning the basics can help you make more comfortable choices. Let’s take a look, shall we?
These low risk investments include your friendly savings account, money market accounts, and Certificates of Deposit (CDs). These investments are not subject to swings in market value, so they offer a low rate of return. Use them to keep emergency funds, save for short-term goals, or as a holding pen for money you may invest later.
These investments help issuers — like governments, cities, or corporations — to borrow money. Issuers usually have to pay interest to the bond owners at regular intervals and repay the total borrowed amount at a specified date in the future. Most bond investors buy a bond to get this payout, but bonds can also rise and fall in value based on market forces. So, you can sometimes sell a bond for more than it cost you and make more money. Of course, the opposite is also true. Still, since many bonds are more stable than stocks, they can be used to generate income, save for shorter-term goals, or add balance to a portfolio with higher risk stock investments.
These higher risk investments are where the whole “buy low, sell high” excitement happens. Equities, give you ownership. You buy part of a company (think stock) or asset (think real estate or a commodity like gold, oil, or grain), hoping the value will rise. If it does, you profit when you sell. If it doesn’t, you don’t. Because value of equity investments (especially stock) goes up and down, when you plan to sell becomes critically important. These investments should only be used for long-term goals AND in cases where an investor is willing to take on higher risks in exchange for higher potential returns.
The good news is that you don’t have to put all your investment eggs in one basket — it’s much better to mix it up. You don’t even have to pick and choose by yourself. No matter how small, starting early gives you a greater chance of success in the end.