Investment Choices

Once you've created an account with your bank or other financial institution, it is time to start looking at the different investment choices. The account type may limit what choices are allowed.

Certificate of Deposit
Certificate of Deposits (or CDs for short) are a product typically offered by banks. You deposit money for a set time period, and they provide interest. The rates are generally better than that of a savings account, but there are penalties for withdrawing the money early.

Bond
A bond can be considered a loan to a government, agency, or corporation. In general, this type of investment provides steady interest payments over a specified time period (term) plus repayment of the principal upon maturity. Some bonds are "callable", meaning that under certain conditions the issuer can repay the loan early. There is a risk that the issuer will be unable to pay (goes into default). If you need to sell the bond prior to maturity, there is also the risk that the bond will be unattractive to other investors (such as if interest rates rise) and you will have to sell at a loss. In general, a higher rate means higher risk.

Stock
Buying shares of a company's stock is like owning a piece of the company. If a company is doing well, the stock tends to rise. Conversely, if the company is doing poorly the stock may suffer. Some companies offer a dividend, giving profit back to investors. Others keep the profits and use them to grow the business.

Mutual Fund
A mutual fund is a professionally managed collection of equities, bonds, and other securities. Each fund has its own investment objectives, which will be stated in the fund's prospectus. The fund managers are responsible for researching the underlying investments and reacting to the market conditions. Since that is their primary occupation, the assumption is that they will outperform other investors. However, there are fees associated with mutual funds (sometimes quite large) which can lower the overall performance.

Exchange Traded Fund
Like a mutual fund, an Exchange Traded Fund (or ETF) is a collection of equities, bonds, and other securities. They typically follow and index, which requires less active management than a mutual fund, resulting in lower fees.