Types of Investments

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There are any number of thousands of different investments; from the tens of thousands of individual stocks listed on domestic markets, and all-around the world to the small number of REITs and specialty products trading on the smaller markets. We’ll break down the different types, provide an explanation for each, and make the whole of the investing scene a whole lot more “local.”

Individual stocks are perhaps one of the most common investments. There are two types of stock: common stock and preferred stock. Common stock represents ownership in a company, and may provide for some small payments known as dividends, or a share of the company’s profit.

Preferred shares are issued as debt instruments that can be converted into shares of stock at a certain price, or treated instead like bonds. When left alone, preferred stocks pay a high rate of interest (usually higher than corporate debt and common stock dividends) but are not considered to be an ownership stake, as they have no voting rights.

Debt Instruments

Also known as fixed-income investments, debt instruments include corporate, government, and municipal debt, and under the larger umbrella of fixed income investments also include: certificates of deposits, and money markets.

Corporate debt or corporate bonds are certificates issued by a company that are then bought by institutions, or individual investors for a profit. Essentially, investors pay for the right to a certain amount of money in the future (the amount the company wishes to borrow) plus interest payments in the present. Over time, monthly, quarterly, or annual interest payments are made to investors (known as the coupon) and at the end of the bond term (maturity) the bond is called, and investors receive their invested principle back.

Government debt operates much like corporate debt, but it is considered to be a safer investment. Because few countries (with the exception of recent crises) fail to make good on their debts, investors can be sure that they will not only receive a return, but also have a feeling of security that they will receive their investment back in the future. As a result, these low-risk debt instruments are a very low-yielding type of investment, providing for returns 1-2% lower than that of corporate debt.

Municipal debt obligations are those that are issued on behalf of cities rather than national governments. Unlike other forms of debt instruments, municipal debt has one very big advantage: the earnings are untaxed by the Federal government. As a result, municipal bonds usually have lower yields (demand for bonds pushes rates down) because those in the highest tax brackets prefer to buy these form of bonds.

CDs and money market accounts will round out our list of debt instruments. Certificates of Deposit are purchased from banks, and operate much like a basic savings account—except you can’t withdraw any time you want! In fact, depending on how long your cash is locked into a CD will greatly affect the interest you receive for lending your money. Certificates of deposit are protected and insured by the FDIC (the Federal Government) and yield roughly the same as other government products of the same maturity length.

Money market accounts are like certificates of deposit, but allow investors to have access to their money whenever they’d like. This flexibility comes at a cost, though, since money markets typically yield less than certificates of deposit, and only slightly more than your average savings account. Also FDIC insured, these are very safe investment vehicles.

A final type of investment is an annuity, which is very much like a pension program or fixed-income derivative. With an annuity, investors can invest in any number of different investments and receive at a later date a certain amount monthly from their investment amount. If, for example, you were to purchase a variable annuity at 40 years old, it could grow in a portfolio of stocks until you were 70, at which point an insurance company would begin to send you checks each month for the rest of your life. These are excellent and very safe investments for the long-term planner.

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