There are three main types of investments: You can invest in any or all three investment types directly or indirectly by buying mutual funds. Another option is to invest in tax-deferred options, such as an IRA or annuity.
Stocks
Companies sell shares of stock to raise money for start-up or growth. When you invest in stocks, you’re buying a share of ownership in a corporation. You’re a shareholder.
There are two types of stock:
- Common stock. Shareholders have a percentage of ownership, have the right to vote on issues affecting the company and may receive dividends.
- Preferred stock.
Investment returns and risks for both types of stocks vary, depending on factors such as the economy, political scene, the company's performance and other stock market factors.
Bonds
When you buy a bond, you’re lending money to a company or governmental entity, such as a city, state or nation.
Bonds are issued for a set period of time during which interest payments are made to the bondholder. The amount of these payments depends on the interest rate established by the issuer of the bond when the bond is issued. This is called a coupon rate, which can be fixed or variable. At the end of the set period of time (maturity date), the bond issuer is required to repay the par, or face value, of the bond (the original loan amount).
Bonds are considered a more stable investment compared to stocks because they usually provide a steady flow of income. But because they’re more stable, their long-term return probably will be less when compared to stocks. Bonds, however, can sometimes outperform a particular stock’s rate of return.
Keep in mind that bonds are subject to a number of investment risks including credit risk, repayment risk and interest rate risk.
Cash equivalent
Cash equivalent investments protect your original investment and let you have access to your money. Examples include:
- Savings accounts
- Money market accounts
- Certificates of deposit (CDs)
These different types of investments generally deliver a more stable rate of return. But cash equivalent investments aren’t designed for long-term investment goals such as retirement. After taxes are paid, the rate of return is often so low that it doesn’t keep pace with inflation.
Investments are tools to help you reach your goals. Knowing more about how to use them may help improve your financial future. The answers to a few simple investment questions can move you a long way toward understanding what you need and how your portfolio can help. Think about your investment portfolio and ask a financial professional these 5 questions: Most people find it easier to allocate their savings toward particular goals. Are you saving for retirement? Is this an emergency fund? Do you want to take a dream vacation? Are you concerned about paying for long-term care in retirement? Determining your broad objectives will help you make decisions about such issues as the amount of risk you are willing to tolerate and the types of investment products that fit best with your philosophy. For example, if your goal is an emergency fund, you might select a low-risk investment, which in turn may mean that it has a smaller return. Of course, you want to make as much money as possible, but it's important to remember that the way you choose to invest that money may have particular constraints that can limit how much — or how quickly — you see returns on that investment. There are two main factors that affect returns: risk and fees. It helps to understand how much money an investment is likely to make; the form of that return, such as capital gains, interest or dividends; and the cost of the investment. With that understanding, you can make the investment decision that aligns with your financial goals. For example, some people choose retirement investments that have a potentially higher rate of return because they have more time to make up losses, which may not be the case with money allocated for a down payment on a first house. All investing involves some risk. This means that, no matter the type of investment you make, there's a level of uncertainty regarding how the investment may perform or how much money you might — or might not — earn from it. This means your investment may earn more than you expect in any one year, or you may lose some or all of the investment. How much risk you can bear depends not only on your personal temperament but also on how much time will pass until you need the money — and what your overall financial position is. Certain types of investments carry tax advantages, at least for some investors. For example, making contributions to retirement plans, college savings plans and certain types of life insurance policies may reduce income taxes for the year you invest that money. Whether or not you may benefit depends on what state you live in and your overall financial situation. Selling some investments also impacts your taxes for the year. If you earned money on the investments you made, you pay capital gains taxes on the profit you earned. If you sell an investment at a loss, meaning less than you paid for it, you can claim that loss to lower other capital gains amounts on your tax return for the year. People and families differ in their financial needs. Maybe you have stock from your employer, expect to inherit farmland from your grandfather or have a religious objection to certain types of investments. Other common but special circ*mstances include the need to provide for a child with a disability, pursue philanthropic interests or support a blended family. These will affect your financial goals, your risk and return requirements, and possibly your tax situation. This isn’t a one-time exercise. Your financial situation and the financial markets will change over time, so revisiting these questions will help keep you on track. As the answers to these investment questions change, you can alter your financial planning so that your money continues to work for you. Make sure you have a knowledgeable financial professional help you answer these questions and make sound decisions that address your needs.5 Investment Questions to Ask About Your Portfolio
1. What is this money for?
2. What is the expected rate of return?
3. How much risk can I tolerate?
4. What is my tax situation?
5. What are my special needs and circ*mstances?
Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved. Neither Nationwide nor its representatives give legal or tax advice. Please consult with your attorney or tax professional for answers to your specific tax questions.
