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Most people know that they should invest if they want their money to outpace inflation over the long run. But it’s easy to get overwhelmed by the sheer volume of investment information that’s available, from 24-hour financial news shows to endless articles on the internet. To cut through all the noise, it’s helpful to think of investments as having one of three types: growth, income, or growth and income. While there is no best investment type for every investor, your own personal financial objectives and risk tolerance will help guide you to what’s best for you within one of these three main classifications. Of course, there are countless types of specific investments within these broad categories. But if you confine your search to these 10 main types of investments, it can help prevent you from being overwhelmed.
When people think about long-term investments, stocks are usually at the top of the list. A share of stock represents ownership in a company. Most well-known companies, from Amazon and Apple to Tesla and Coca-Cola, are publicly traded, meaning you can buy or sell shares of their stock on an exchange. Although supply and demand is what makes the share price of a stock fluctuate from minute to minute, it is the financial success of the underlying business that is one of the primary drivers of a stock’s price. For example, when a company reports booming sales and earnings, investors tend to flood into the market and drive up shares of a stock. But if revenue is below expectations and a company paints a gloomy outlook for the future, investors tend to sell their shares and move on to other investments. This is why it’s important to pick stocks that have good long-term prospects ahead of them.
Bonds are income-generating investments that are generally more conservative than stocks, which is part of the reason their expected return is generally lower. A bond is essentially a loan agreement in which investors provide money to companies in exchange for the promise of ongoing interest payments and the return of their principal at a specified future date. In a perfect world, this would make bonds extremely low risk, and this can indeed be the case. However, bonds are not without risk. If an issuer has financial difficulties, it may not be able to make payments. This is why many bonds carry ratings from outside agencies, to help investors gauge the financial risk of a bond issuer. But bonds also carry interest rate risk due to the fact that bond prices trade down when interest rates rise, and vice versa.
Savings accounts are among the most conservative …….