Stocks, Bonds, and More

Most people think of stocks when asked about investing, but there are many different securities products for investors to consider. Here is a list of some of the more common types of investments. It is by no means a comprehensive list. Remember, you should thoroughly understand a product before investing.

Annuities
Annuities are most commonly used to generate retirement income. The money is returned to you, with interest, in regular payments. Depending on the product, you can choose to receive payments for a set number of years or for the rest of your life. You can receive monthly, quarterly, semi-annual, or annual payments.

Annuities are complex products that may combine the characteristics of insurance and investment securities. Because of their hybrid nature, annuities are sometimes marketed as one-size-fits-all products. This is simply not true.

There are generally three types of annuities: fixed, variable, and indexed, which may be immediate or deferred. The type of annuity you choose will determine how you earn (or lose) money based on the annuity’s performance. It is extremely important to understand how the annuity earns money, as well as how it subjects your investment to risk. With so many options on the market, ask a few simple questions before you add an annuity to your portfolio.

To learn more about annuities and the risks involved, we encourage you to read an Informed Investor Alert (NASAA).  

Bonds
A bond is a debt investment in which an investor loans money to an entity (corporate or government) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.

Think of bonds as long-term promissory notes, in which the issuer agrees to pay the owner the amount of the face value on a future date and to pay interest at a specified rate at regular intervals. Bonds are considered a lower risk type of investment, but they also tend to yield smaller returns as a result.

To learn more about bonds as an investment, we encourage you to read Investopedia's thorough review of bonds.

Complex Investments
Over time, a number of complex investments have been developed, but these investments are rarely suitable for the casual investor. Such products should be handled with caution. Examples include hedge funds, REITs, digital currency, binary options, and even marijuana! These investments may have the potential for higher gains, but they carry greater risks. NASAA created an investor alert called “The Next Big Thing,” and it discusses the risks involved with some of these investments.

Cryptocurrency
Most people think of Bitcoin when they hear the word cryptocurrency, but there are more than 2,900 different cryptocurrencies in existence. Cryptocurrencies are digital assets created by companies or individuals that take the form of a virtual coin or token. Anyone can create a cryptocurrency. This form of currency only exists digitally, and central banks and other government authorities do not insure or control cryptocurrencies.

There are some common concerns with cryptocurrencies that you need to understand before purchasing.

  • Volatility- Cryptocurrency markets are highly volatile, making them unsuitable for most investors looking to meet long-term savings or retirement goals. To understand this volatility, just look to the Bitcoin crash of 2018. It was valued at $6,447 on October 31, 2017 before spiking to an all-time high of $19,068 on December 17, 2017 and returning to $6,283 as of October 30, 2018. Other cryptocurrencies experienced similar volatility.
  • No recourse- Cryptocurrency and many crypto-related assets are subject to minimal regulatory oversight, and there may be no recourse should the cryptocurrency disappear due to a cybersecurity breach or hack.
  • Untraceable- Cryptocurrency or crypto-related assets only exist digitally. Issuers can be located anywhere in the world, so it may be impossible to trace and recover lost funds through the courts.
  • Uninsured- Cryptocurrency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC). 
  • Unregulated- Cryptocurrency buyers rely upon unregulated exchanges that may lack appropriate internal controls, making them susceptible to fraud, theft, and hacking.
  • Hackable- Creating a digital wallet to store cryptocurrency involves installing software on an investor’s computer. As with any software download, hackers may include malicious code.
  • Vulnerable- Purchasers of cryptocurrencies rely on the strength of their own computer systems as well as systems provided by third parties to protect purchased cryptocurrencies from theft.

Exchange-Traded Funds
Exchange-traded funds (ETFs) are pools of investments that trade on a stock exchange. They’re popular with investors who are looking to diversify their portfolios, and the relatively low cost of ETFs adds to the appeal. An ETF can invest in equities, bonds, or commodities, and may specialize by industry, sector, or country.

Just like any other investment product, there are risks involved, but that risk varies because each ETF has a different mix of investments. ETFs carry many of the same risks as any other security that trades on an exchange. ETFs also carry brokerage fees for buying and selling. The management expense ratio (MER) for an ETF is usually lower than an indexed mutual fund or an actively managed mutual fund.

Mutual Funds
Mutual funds are operated by an investment company that pools funds from multiple investors and invests in stocks, bonds, short-term money market instruments, and/or other securities. The investments in a mutual fund are managed by a portfolio manager, who decides when to buy and sell investments according to the investment objectives of the fund. Mutual funds appeal to investors who want a range of investments without the extra work of managing them, but fees can affect your return.

REITs
Real estate can be a lucrative investment at any age, however it usually requires a lot of money or very good credit to get started. For busy individuals who might not have the extra cash for a huge down payment, a real estate investment trust (REIT) might be a less demanding way to get started. REITs are also an attractive option for diversifying your portfolio, because they are in a different asset class than stocks or bonds.

REITs allow investors to pool money together to invest in large-scale, income-producing commercial real estate. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. This collaboration provides people who may not have the funds to buy commercial real estate on their own with the opportunities to invest but without the time commitment and cost of buying and managing a property. 

REITs can be found in public and private markets, although publicly-traded REITs are the most liquid. Before investing in a REIT, you should understand whether it is publicly traded and how this could affect the benefits and risks.

To learn more about REITS, check out our MoneyWise Matters blog post on the subject.

Stocks
The most well-known investment product is stock. This type of security signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. Stocks are also called “equities.”

Investors buy stocks for various reasons, including capital appreciation, dividend payments, and the ability to vote shares and influence a company. Companies issue stocks for various reasons, including paying off debt, launching new products, expanding into new markets, and enlarging or building new facilities.

There are two main kinds of stocks: common and preferred. Common stock entitles owners to vote at shareholder meetings and receive dividends. Preferred stockholders usually don’t have voting rights, but they receive dividend payments before common stockholders, and they have priority over common stockholders if the company goes bankrupt and its assets are liquidated.

You can learn more about stocks by visiting the SEC’s education website.