The Different Types of Financial Investments
You may have a savings account or a certificate of deposit, which is a good foundation for savings. However, investing differs from savings — investing is about making your money grow while minimizing risk, while savings is about protecting the funds that you’ve collected from risk altogether. Choosing the right financial investments to help your money grow depends on your personal situation, which is something to discuss with your financial adviser.
Companies that are incorporated issue ownership shares in the form of stock certificates. Each share of stock represents an ownership interest in the company, and stockholders are entitled to receive payouts on the earnings of a company as dividends. Common stock allows the stockholder to vote and attend stockholders’ meetings. Preferred stockholders have priority in receiving dividends, and may receive dividends at a fixed annual rate. Preferred stockholders are also first in line to recover any remaining assets after a corporate liquidation.
Bonds represent a promise to pay the face value of the bond to its holder after a specified period of time. Bonds are issued by the U.S. government, by states and municipalities, by corporations or by foreign governments. Bonds earn interest in addition to the principal, or initial investment. However, like stocks, bonds are not guaranteed against loss.
Nonetheless, bonds are generally less volatile than stocks because many bonds are issued by stable governments or large corporations with substantial assets. In fact, U.S. Treasury bonds, including savings bonds, are considered among the safest of investment instruments.
At barrons.com they note that mutual funds represent a combination of financial investments, including stocks, bonds and other financial instruments. The selection of investments and the management of the mutual fund are assigned to a mutual fund manager. Mutual funds fall into three broad categories, based on the perceived level of risk.
Growth-oriented mutual funds include a larger proportion of stocks and other potentially high-yield financial instruments. Mutual funds designed to preserve present income emphasize U.S. Treasury bonds or other relatively safe investments. Stability funds aim for investment growth with a minimum of risk by focusing on “blue-chip” stocks and high-quality bonds.
Annuities are often used as retirement planning investments. In the accumulation phase, you invest money into the annuity; once you reach the annuitization phase, you collect payments. Lottery winnings and personal injury lawsuit judgments are often awarded as annuities. If you die before you begin collecting payments, your named beneficiary would receive the current value of the annuity or the amount you’ve actually paid into the annuity, whichever is greater.
There is no death benefit once you’ve actually begun collecting annuity payments. However, if you have an annuity that has an annuitization term of a fixed number of years, and you die before the term has ended, your named beneficiary would collect the remaining payments through the end of the term.