Cash equivalents seek to preserve the money you invest and provide a steady stream of current income through the interest earned on the investment.
These investment vehicles are short-term investments such as money market funds, certificates of deposits (CDs) and Treasury Bills. A CD is a certificate by a bank or a savings and loan association that a fixed dollar amount has been deposited with it for a fixed period at a predetermined rate of interest.
These investments are “liquid” or easy to redeem as cash and are often backed by the U.S. government. Funds that invest in this category seek to preserve your capital (the money you invest) and provide a steady stream of current income through the interest earned on the investment. These types of investments are considered relatively “secure” and offer a lower investment risk. However, this also means that they generally have a lower rate of return and a higher inflation risk than other types of investments.
When you purchase a bond, you’re essentially buying an IOU.
If you lend money to someone, you get an IOU, or a promise that the money will be paid back. When you purchase a bond, you’re essentially buying that IOU. Corporations, municipalities, and government agencies (such as the U.S. Treasury) can issue bonds. A bond’s rating gives you an idea of how likely it is that the entity that issued the bond will be able to make its payments on the loan. Most bonds pay interest at specific intervals. You get back the original loan amount – the principal – when the bond matures (the date the loan is paid off).
A bond can be bought or sold between the time it is first issued and its maturity date. The value of a bond can fluctuate during this period. When interest rates are rising, bond prices usually go down. The reverse typically happens when interest rates are falling – bond prices usually go up. Bonds offer moderate investment and inflation risk. Their values are generally subject to fewer price swings than stock funds and usually have a higher rate of return than cash equivalent funds.
Stocks rise and fall in value depending upon the performance of the company and the investment market’s reaction to how well the company is performing or other economic or environmental factors.
Common stock is a unit of ownership in a company. Each share of stock represents a part of the company that issued it. Stocks rise and fall in value depending upon the performance of the company and the investment market’s reaction to how well the company is performing. In addition to the market value of a stock, some stocks pay dividends, which offer the investor the opportunity for current income without selling the stock.
Stocks provide the potential for higher investment risk and a lower inflation risk than cash equivalent and bond investments in exchange for greater long-term growth potential.
A mutual fund is m oney pooled by investors that is professionally managed, diversified, and follows a particular investment objective. A mutual fund can invest in different types of investment vehicles, such as stocks, bonds, or real estate.
A mutual fund is a fund operated by an investment company that raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives (for example, high-growth stocks, blue chip or high-quality stocks, high-rated or low-rated bonds, international stocks, pharmaceutical stocks, etc.). Benefits may include diversification, risk management, and professional money management. Shares are issued or redeemed on demand, based on the fund's net asset value (NAV), which is determined at the end of each trading session (or business day that the market is open). Mutual funds may contain only one or any combination of investments including stocks, bonds, cash equivalents, real estate, etc.