Stocks

A stock is a share of a company. When you buy stock, you have an ownership share in that company. You can categorize stocks based on:

• Market capitalization. This term means how much investors think the company is worth. “Small-cap,” “mid-cap,” and “large-cap” are types of market capitalization.

• Growth or value. Growth stocks have the potential for greater rewards but come with a higher risk. Value stocks focus on holding their value and growing steadily over time. The market also classifies certain stocks as blends of growth and value.

• Industry. You can also divide stocks into sectors, such as energy, real estate, and health care, among others. Typically, when stocks in one sector do well, stocks in another sector go down.

Advantages and Disadvantages

Stocks typically have a greater potential for return than other investments. They also have a higher degree of risk. Building a diversified portfolio with different types of stocks and other investments can help lower your risks.

Cash Equivalents

Many financial experts suggest keeping some money in more liquid investments that are easier to convert back to cash.

Money market funds are mutual funds that provide interest payments (generally small, around 1% to 2%). Stable value funds and savings accounts also fit in this category.

Advantages and Disadvantages

Money markets are generally lower risk than other investment options, such as stocks, but they offer lower returns.

Bonds

A bond is a loan that you give to a corporation, government, federal agency, or other organization. In return, you get interest on the loan. The borrower pays back the entire amount (principal plus interest) when the bond matures. Treasuries, corporate bonds, and municipal bonds are types of bonds.

Advantages and Disadvantages

Bonds can provide a steady stream of income, preserve your principal, and help diversify your portfolio. Typically, stocks and bonds follow different patterns: if stocks are down, bonds will be up. Like other types of investments, bonds also come with risks. For example, bonds might not keep pace with inflation. Or a borrower may not be able to make interest payments or pay back the principal.

Mutual Funds

Mutual funds pool money from many investors. Fund managers use that money to purchase a range of investments, such as stocks, bonds, or cash. When you invest in a mutual fund, you’re purchasing shares of the funds and you own a part of all underlying investments.

Advantages and Disadvantages

Mutual funds offer built-in diversification because you’re investing in several companies within an industry or even across industries. But they’re still subject to fluctuations in the market. Before you invest in a mutual fund, take a look at the investment strategy and the potential risks.