What is an investment?
Broadly speaking, an investment is an asset purchased with the idea that the asset will provide income in the future and/or appreciate in value. When making investment decisions, investors should be aware of the risk/return potential of any investment they are considering. In general, the greater the chance for a substantial reward, the greater the risk of a loss. Investors should also consider their own comfort with risk, the length of time they have to invest before taking income from or selling an investment, the fees associated with investments, and their ultimate goal for investing, e.g. retirement, education funding, estate planning. Your Financial Professional can help you develop a plan for your investments that takes these key factors into consideration.
How will I know what investment to select?
Most investors – from the newest to the most experienced – focus on three investment categories (or asset classes): stocks; bonds; and cash or cash equivalents. In recent years other product types have joined the mainstream of investment choices, including exchange-traded funds (ETFs) and annuities.
Stocks are equity investments, or ownership shares in a business. When you and other investors buy shares, you actually buy part of the business. If it prospers, you may make money because you’re paid a portion of the profits, or because the value of the stock increases, or both. Stocks can lose value, including the amount you invested.
Bonds are loans that investors make to corporations or governments. When they borrow, these bond issuers promise to pay back the full amount of the loan at a specific time, plus interest, or a percentage of the loan amount, for the use of your money. Investors buy bonds, also known as fixed income investments, because they expect to receive their investment amount back and because they like the idea of regular interest income. Interest-rate movements up or down typically have the greatest impact on bond prices.
Short-term/cash-equivalents are low- risk investments, including money market accounts and certificates of deposit (CDs), which generally have lower expected yields than stocks, bonds and other investments. There may be a penalty for early withdrawal of a CD.
Mutual funds buy equity or bond investments or both with money from you and other investors. With the pooled cash, a fund can buy many different investments and provide more diversification than you could achieve on your own for the amount you invest. Professional management is provided for a fee. Mutual funds are sold by prospectus and an investor may lose money if shares are sold when prices are declining.
Exchange-traded funds (ETFs) are pooled investment fund vehicles (like mutual funds) that are designed to track a market index, such as the S&P 500. Unlike mutual funds that price and trade once a day, ETFs trade on the major exchanges like individual stocks. ETFs are subject to market risk and shares may lose value when sold. Trading in ETFs may incur commissions and other brokerage charges.
Annuities are tax-deferred savings vehicles designed to provide future income at either a fixed or variable rate.
A financial professional can help you select the investments that will help you meet your financial objectives.