Today, we welcome guest writer Angie Picardo. We thank her for submitting the following article for our blog. Please note that information and opinions expressed on all guest posts belong to the writer, and do not necessarily reflect the opinions of Covenant Trust Company.
If you have little or no knowledge about the different types of investments, starting out can be a daunting process. There’s always risk involved, and making the right decision when it comes to investing is something everybody wants. That’s why taking the time to learn key investment terms and identify the differences between investment types is the first step to steering you toward the financial plan that works best for you (and putting more money in your pocket). Here are some basic terms you need to know.
Assets and Liabilities
Assets are properties that hold monetary value. Examples of assets include cash, savings funds, real estate, vehicles, cash-permanent life insurance policies, stocks, jewelry and precious stones, and commodities. Assets increase your net worth.
On the opposite end of the spectrum, liabilities represent money owed in the form of debts or financial obligations. Liabilities decrease your net worth.
In short, bonds are a form of loan, which is a type of debt. The person who is holding the bond is the person doing the lending, and the person giving the bond is the person in debt. So in a sense, it’s a type of IOU. Borrowers agree to pay interest (and to pay back the original loaned amount). Often, bonds are given out by institutions like credit card companies and public authorities.
You may have heard about bonds in one of their most common forms: savings bonds. These are often given to children as gifts so they learn about the benefits of saving. While this type of bond has little risk, other types are threatened by inflation, credit, and other kinds of risk.
Stocks (also known as shares) allow the purchaser to become a part owner of a business. When a company is successful, so are stockholders.
Stockholders have vested interest in the company and usually have voting rights during shareholders meetings.
Mutual funds are mixed investments – grab bags that may include an assortment of stocks, bonds, properties and other cash equivalents. Mutual funds are typically handled by professional money managers and can reflect the personal investment style of the investor.
“Diversification” is a word you’ll hear often in regards to mutual funds. Diversification – meaning putting your money in many different areas via various types of investments – is a method of reducing risk and decreasing the likelihood of heavy losses. Put simply, it’s to ensure not all of your eggs go in the same basket. (Because if that basket slips out of your hands, well, you’re out of luck. And eggs.)
There are many more types of investments including foreign exchange currencies and derivatives, but bonds, stocks, and mutual funds are perhaps the best places to start for those just learning about investments. The investment world might seem daunting, but it’s important to learn more about it and start investing so that your money can start working for you for a change.
Angie Picardo is a staff writer for NerdWallet. Her mission is to help investors stay financially savvy and save money.