How to invest your hard-earned money is a very crucial decision. Financial markets are very complex. There are many options which are confusing people about the best places to put their hard earned money. To decide which investment options are best, you need to know their features and why they are relevant for a particular investment objective.
The following key terms can help you understand the investment process and enable you to make financially sound decisions:
Stock: Stocks are also known as equities or shares. When you buy a company’s stock, you become a part owner of the company. And, if the company performs well, your stock will also do well and gain profits. You can also buy and sell the stocks whenever you want. The advantage of investing in stocks is that all the invested money is liquid and you can easily exit the market, if your stocks are doing well by booking profits.
Bond: They are certificates of debt. By purchasing bonds or debts an investor becomes a creditor to the government or the company for a pre-set interest rate paid regularly for a defined period. On maturity, total face value of the bond is paid to the investor. The main benefit of buying bonds is that you have a higher claim on assets than shareholders. Also, you know the exact amount, you will be getting when you purchase a bond. The major disadvantage of owing bonds is its illiquidity. Your money is locked for a particular period of time.
Mutual fund: It is a mixture of bonds and stocks. Buying them is like pooling money with other investors, and hiring a professional manager to invest in particular securities on behalf the pooled investors like you. The main benefit of a mutual fund is that you can invest your money without any expertise and time.
Exchange-traded fund (ETF): ETFs is referred as a portfolio of securities that trade like stocks. Investing in an ETF is more like purchasing shares of the total fund rather than shares of individual companies.
Money market account: It is a kind of savings account that gives a competitive interest rate in exchange for huge deposits.
So, you now know about the most common investment options. However, there are many other options, which represent the most complicated types investing strategies. By taking the time to know about the types of investments and the strategies that complements them, you can become a savvier investor.