Types of Security Investments
There are many different securities that you can invest your money in. They’re usually divided into two categories. Equity securities grant you partial ownership of a company. Debt securities are considered loans to companies or entities of the government. Here’s a quick refresher on some of the most popular security investments.
Stocks are the best known equity security. You’re purchasing an ownership interest in a company when you buy stock. You’re entitled to a portion of the company profits and sometimes shareholder voting rights.
Stock prices can fluctuate greatly. Investors try to buy stock when the price is low and sell it when the price is high. Stock has a higher investment risk than most other securities. There’s no guarantee that you won’t lose money. However, stock usually has the potential for the greatest returns.
Most stock is considered common stock. Preferred stock normally offers dividends but not voting rights. Common stockholders also have greater potential for higher returns.
A corporate bond is a debt instrument issued by a company. It’s a loan to the company when you invest in a bond. You’re entitled to receive interest each year on the loan until it’s paid off.
Bonds are safer and more stable than stocks. You’re guaranteed a steady income from bonds. However, bondholders aren’t entitled to dividends or voting rights. In addition, stockholders have potential for greater returns in the long run.
Government bonds are issued by the United States federal government. The most common are Treasury bonds. They’re issued to help finance the national debt.
Government bonds have very low investment risk. In fact, they’re virtually risk-free since they’re guaranteed by the United States government. However, the potential return is lower than stocks and corporate bonds.
Municipal bonds are debt securities from state and local government entities. These local entities include counties, cities, towns, and school districts. The interest income you earn on municipal bonds is usually exempt from federal income taxes. It may also be exempt from state and local income taxes if you live where the bonds are issued. However, the interest rate is usually lower than corporate bonds.
A mutual fund is made up of a variety of securities. It may focus on stocks, bonds, or a collection of both. Your money is usually pooled with other investors. An investment company chooses the securities and manages the mutual fund. This diversity helps decrease investment risk.
A stock option is the right to buy or sell a stock at a certain price for a period of time. A call is the right to buy the stock. A put is the right to sell the stock. Stock options can be used to help reduce your investment risk.
A futures contract is an agreement to sell a specific commodity at a future date for an agreed upon price. A futures option is the right to buy or sell a futures contract at a certain price for a specific period of time. Many investors use futures options to try to reduce investment risk.