Many people ask what is the difference between, stocks, bonds, and mutual funds? Below are some explanations of the types of investments (not including insurance, annuities, and IRA's). This page is only informational and for educational purposes. We do not recommend what products you should invest in, please seek a qualified financial advisor for your investment needs.
A. CASH - Safety, Gifting, Emergency Funds, Short Term Goals
1. Bank and Savings - A bank account that generally provides a low, guaranteed, fixed rate of return and FDIC insurance.
2. Certificate of Deposit - a financial document showing that a person or organization has a specified sum on deposit at a bank, usually for a set period An FDIC-insured CD is a low-risk investment. Normally 3months to 5 years.
3. Savings Bond - Issued by the U.S. government. The face values range from $50 (EE bonds) to $10,000
(H bonds). Some savings bonds are purchased at half the face value and mature at face value. The maturity date depends on the rates of interest during the holding period. The different kinds of bonds are E and EE bonds, H bonds and I bonds.
B. BONDS - loan money to the government or to a company for a set period of time during which interest payments are made to the bondholder. Bonds have a credit rating starting with (AAA, AA,A,BBB,BB,B....D)
1. Treasuries- direct obligations of the U.S. government. The federal government uses the proceeds from treasuries to finance its budget. Each treasury is backed by the full faith, credit and taxing power of the U.S. Government and is generally considered the safest investment in the world.
A. T-Bill: Short-term treasuries with maturities of one year or less.
B. T-Note: Medium-term treasuries paying interest semi-annually. Notes have a fixed maturity date of greater than one year and can be as long as 10 years. The minimum face value denomination is $1,000.
C. T-Bonds: Long-term treasuries that also pay interest semi-annually. Maturities range from 10 to 30 years, and the minimum denomination is also $1,000.
2. Government Agency Bonds- issued by government agencies and are generally not insured by the federal government. They include: Ginnie Maes, Fannie Maes, Freddie Macs. Although the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (which insure GNMAs, FNMAs, and Freddie Macs, respectively) are all federal agencies, only the Ginnie Maes are backed by the full faith and credit of the United States. BUT Fannie Mae and Freddie Macs were part of the government bailout September 2008.
3. Municipal Bonds or munis - issued by state and local government agencies to pay for civic and governmental programs. The interest from these bonds is exempt from federal income taxes. Some municipal bonds may also be exempt from state and local income taxes. The higher the income tax bracket, the more attractive munis become.
A. Revenue bonds — backed by the ability of the specific project to generate revenue such as water plants, toll, airport who pay back by their revenues
B. General obligation bonds — backed but not guaranteed by the full faith and credit of the issuer, might use taxes to repay
C. Special project bonds — used to fund projects such as stadiums, convention centers, etc.
4. Corporate Bonds - issued by corporations to fund their financial needs in a way that does not dilute company ownership (unlike stocks.) Corporate bonds usually pay higher rates of interest than government and municipal bonds, since more risk is generally involved. Bondholders are creditors of the company. This means that if the company goes bankrupt and the assets of the company are liquidated, bondholder claims must be paid before stockholder claims.
A. Secured bonds — backed by corporate real estate or equipment.
B. Debentures — backed but not guaranteed by the credit of the issuing company.
C. Convertible bonds — may be exchanged for stock if the company's common stock reaches a predetermined price.
C. STOCKS - you’re buying a share of ownership in a corporation and become a shareholder. Companies sell shares of stock to raise money for start-up or growth of the company.
1. Common stock - shareholders have a percentage of ownership. For example, if you own one share of common stock in a company that has 100 shares, you own 1 percent of the company. Common stock shareholders also have the right to vote on issues affecting the company. Common stockholders may or may not receive dividends based on company profits
2. Preferred stock - usually does not offer voting rights, but shareholders are generally entitled to dividends (the company’s profits distributed in cash). Preferred stockholders typically receive dividends at specified times and in predetermined amounts;. Gets paid before Common Stocks in a bankruptcy.
D. MUTUAL FUNDS - investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the fund’s assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund’s prospectus.
1. Money Market - A fund usually invested in Treasury bills, CDs and commercial paper from large established institutions. They are normally for a short time period. They are typically safe, liquid investments because they have a stated rate of return and a guarantee. You must pay an plan administrator for their services.
2. Bond/Income Funds - They provide current income on a steady basis. The terms "fixed-income," "bond," and "income" are synonymous.
3. Balanced Funds - They provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities.
4. Asset Allocation - Similar to the Balance Fund, but these kinds of funds do not have to hold a specified percentage of any asset class. The portfolio manager is free to switch the ratio of asset classes
5. Equity Funds - Invest in stocks which object is long-term capital growth with some income.
6. Global/International Funds - An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country.
7. Specialty Funds - consists of funds that have proved to be popular but don't necessarily belong to the categories above.
8. Index Funds - They replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). Benefits investors in the form of low fees.