Investing is a method of contributing money to a particular venture with the goal of of making a profit. People invest money to save for retirement, pay for a child’s education or to earn additional income. Although most all investments have some degree of risk, some types of investing are more risky than others. High risk investments increase the likelihood that you could lose money whereas low risk investments do not pose a significant threat of financial loss. There are several different types of investments, each with their own set of investing characteristics.
Stocks are equity investments that produce profits in the form of dividends and capital gains as the stock increases in value. When you purchase stock, you purchase ownership interest in a company. Each individual share of stock has a specified value. The more shares of stock you own, the greater your ownership interest in the company and the greater your earning potential. Profits earned in stock investing depend greatly on the strength of the company as well as the current nature of the stock market.
Bonds are fixed income investments that produce profits in the form of interest. When you purchase a bond, you loan money to the bond issuer. The bond issuer is usually a corporation, government agency or other organization. In exchange for the money you invest in the bond, the issuer agrees to pay a fixed amount of interest periodically throughout the life of the bond as well as repay your original investment amount when the bond matures. Both stocks and bonds are available for individual purchase on a stock exchange. A stock exchange is an entity where securities are organized and made available for purchase.
Mutual funds allow investors to purchase a combination of stocks, bonds, money markets and other securities in a single investment vehicle. Mutual fund companies organize and manage a portfolio of investments and offer it to the public for purchase. Fund categories include stocks funds, bond funds and balanced funds, which are a combination of stocks and bonds. Investors purchase mutual funds for various reasons, but primarily to invest in several different securities without having to purchase each one individually. For example, an investor interested in stock investing may purchase a stock mutual fund. Investors who want a combination of stocks and bonds can purchase a balanced mutual fund. Similar to investing in individual stocks and individual bonds, mutual funds pay investors income distributions in the form of dividends and interest.
Other types of investments exist that are unrelated to the stock market or securities investing. Some investors are uncomfortable with the volatility of the stock market but still want to invest money. Rather than investing in stocks, bonds and mutual funds, many investors put their money into real estate and businesses. Real estate investing, for example, allows investors to purchase property to lease or renovate and sell for a profit. Investors also contribute capital to innovative entrepreneurs and businesses with the goal of earning profits and fringe benefits from the company's future success.