FLH-18

The earlier you start investing, the more money you’ll have to pay for your financial dreams and goals. There are four basic types of financial securities and products that you can purchase for your investment portfolio. They are stocks, bonds, mutual funds, and exchange-traded funds.

Stocks are issued by companies—like Apple, Google, and Facebook—that want to raise money. When you buy shares of a stock, you purchase an ownership interest in a company and your shares can go up or down in value over time. Stocks are bought and sold on exchanges, like the New York Stock Exchange or the NASDAQ, and you can monitor their prices in real time online.

Stocks are one of the riskiest investments because the price per share can be volatile, swinging up or down in a short period of time. People can’t be sure about which stocks will increase in value over the short or long term. However, historically, stocks have rewarded investors with higher returns than other major investment classes, like cash or bonds.

Bonds are loans you give to a corporation or government entity, known as the issuer, who wants to raise money for a specific project. Projects paid for by a bond include things such as building a factory or a school. Bonds pay a fixed interest rate over a set period of time. The time can range from weeks to 30 years. In general, interest is higher for longer-term bond terms and for bonds issued by companies with better credit.

Bonds are also called fixed-income investments because the return is guaranteed. In return for a higher degree of safety than stocks, you receive a relatively low rate of return. (Remember that lower risk investments give you a lower return and higher risk investments typically offer higher returns.) But these conservative investments still have some risk. For example, a bond issuer can default on repayment. Agencies such as Standard and Poor’s (standardandpoors.com) do research and offer a rating system of bond safety.

Mutual funds are products that bundle combinations of investments, such as stocks, bonds, and other securities. They’re operated by professional money managers who invest the fund’s money according to stated objectives, such as achieving maximum growth or earning fixed income. Mutual fund shares are purchased directly from the fund company or from investment brokers and can go up or down in value over time.

In general, mutual funds composed of stock have the greatest potential risk and reward; however, there’s a wide range of risk within this category. Mutual funds composed of bonds also have a range of risk but are considered more conservative than stock funds.

Exchange-traded funds are products that bundle combinations of investments—just like mutual funds—but trade like a stock on an exchange throughout the day. These securities are growing in popularity due to their flexibility and low cost. The cost to operate an ETF is very low compared to many mutual funds.