A Guide to Common Investment Products

Low-Risk Investments

Bonds

Bonds are debt instruments issued to raise money from investors. When you purchase a bond, you “lend” money to the issuer in exchange for periodic interest payments and the return of your initial investment after a set time period. Common types include bonds, municipal bonds, and treasury bonds.

Certificates of Deposit (CDs)

CDs are fixed-term savings accounts offered by banks and credit unions. They hold a deposit and pay or accrue interest until maturity. CDs offer less liquidity than standard savings accounts as you cannot deposit to or withdraw from them during the term. If you redeem your CD before maturity, you may face a penalty.

Fixed-rate and variable-rate CDs available. Variable-rate CDs can change either with the market or on a set schedule. Long-term CDs offer higher interest rates but potential early redemption fees by the bank. Brokered CDs are more complex and carry higher risk, some of which may not be federally insured.

Variable-Risk Investments

Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds but trade on stock exchanges like individual. They represent a basket of securities and aim to track the performance of a specific index, sector, or asset class. ETFs offer diversification, transparency, and flexibility, allowing you to buy or sell shares throughout the trading day. They are available for a wide range of asset classes, including stocks, bonds, commodities, and currencies.

Mutual Funds

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of the investors. These investments offer diversification, liquidity, and convenience. Common types of mutual funds include equity funds, bond funds, index funds, and sector funds.

Real Estate Investment Trusts (REITs)

REITs are companies that own, operate, or finance real estate properties which gather income. Similar to mutual funds, they pool money from multiple investors. Most REITs are publicly traded.

Through REITs, individuals can gain exposure to the real estate market without directly owning real estate property. REITs typically generate income through mortgages, rental payments, and capital appreciation.

Stocks

Stocks, or equities, represent ownership in a company. When you buy stocks, you become a shareholder and have a claim to the company's assets and earnings. Stocks offer potential capital appreciation and income from dividends. They can be purchased individually or through mutual funds, exchange-traded funds (ETFs), or index funds.

Exchange Traded Notes (ETNs)

An ETN is an unsecured debt which trades on a major stock exchange, similar to ETNs and stocks. ETNs do not have interest payments. Their value is predicated from the value of the underlying basket of securities. ETNs have both investment risk, based upon the value of the underlying basket of securities, and credit risk related to the issuer.

Commodities

Commodities are raw materials and physical goods like gold, silver, oil, natural gas, and agricultural products. You can gain exposure to commodities through futures contracts, options, commodity ETFs, or investing directly in commodity-producing companies. These investments offer portfolio diversification and hedge against inflation, but they also carry unique risks due to price volatility and market dynamics.

High-Risk Investments

Master Limited Partnerships (MLPs)

MLP’s are partnerships whose shares trade as a security on a stock exchange. An MLP is taxed as a partnership and avoids entity-level income tax. However, the tax aspects can create complexity and require multi-state income tax filings. Underlying investments are often real estate or natural resources. You should discuss with a tax professional before investing in an MLP.

Options

An option is a “derivative” which represents the right, but not the obligation, to buy or sell a pre-determined amount or value of an asset at a fixed price (strike price) by a certain date (expiration). They derived their value from the price of the underlying asset. Calls are the right to buy the asset, and puts are the right to sell the asset.

Options offer flexibility, downside protection, potential income, or bets based on the value of an underlying security. They can have risk of loss greater than the amount invested.

Hedge Funds

Similar to mutual funds, a hedge fund pools money from private investors. A professional manages the assets to invest in securities or other non-typical products. Hedge funds are risky and targeted at high-net worth investors who can afford a large, high-risk initial investment.

It is important to thoroughly research hedge fund managers and understand all associated fees before investing.

Cryptocurrencies

Cryptocurrencies, such as Bitcoin and Ethereum, are digital assets that utilize cryptographic technology for secure transactions. They operate independently of traditional central banks.

Cryptocurrencies are highly volatile and speculative investments, appealing to those seeking potential high returns with high risk tolerance. It is essential to thoroughly research and understand the complexities and risks associated with investing in cryptocurrencies.

Recap

By exploring various investment products, you can navigate the investment landscape with more confidence. This will help you make informed choices which align with your objectives and risk tolerance.

Remember to conduct thorough research, seek professional advice if needed, and always consider your own financial circumstances before making any investment decisions.