When saving money, many people look for ways to add to their wealth by investing it. Investing in stocks, bonds or mutual funds provides investors opportunities to have their money work for them. Each offers various advantages and disadvantages to investors, but which is right for you?
One of the most common investment options is playing the stock market. Stocks are a way to buy equity in a company. Stockholders own a proportionate share of the company based on how much stock is owned.
Investors who are choosing to buy and sell the stock at a certain price in effect set stock prices. The prices can fluctuate numerous times a day.
Wells Fargo reports that stocks historically, as an asset class, have outperformed every other type of investment over long periods of time. However, their values also tend to fluctuate, both up and down, more than other types of investments.
Bonds are another popular option. Bonds are similar to an I.O.U. in that when an investor purchases a bond, they are lending money to, among others, municipalities or federal agencies. In return for the loan, those agencies promise to pay a specified rate of interest during the life of the bond and to repay the face value of the bond when it comes due, according to the Securities and Exchange Commission.
Specific types of bonds include U.S. government securities, municipal bonds, corporate bonds, mortgage- and asset-backed securities, federal agency securities and foreign government bonds.
Many investors also choose to put their money in mutual funds. According to the SEC, a mutual fund is a type of investment that pools money from many investors and invests the money in stocks, bonds, money market instruments or other securities.
The value of the investor's share of that fund can increase or decrease based on the value of all the investments in the fund's portfolio.
As the mutual fund buys and sells investments within its portfolio, it distributes any income received from stock dividends or bond interest to the shareholders along with any capital gains from the sale of securities, according to Wells Fargo.
The SEC encourages all investors to carefully research any type of stock, bond or mutual fund they plan to use in an effort to better understand the risks associated with each. Most people settle on a mix of these investments, to insure some gains, but also protect their nest egg.
Chad Brooks is a Chicago-based freelance business and technology writer who has worked in public relations and spent 10 years as a newspaper reporter. You can reach him at firstname.lastname@example.org or follow him on Twitter @cbrooks76.