Overview of the different types of investments
In their Personal Finance primer, Citibank provides a short and simple explanation of various investment options available to investors.
For a more detailed discussion of these investment products, head over to our article on Time deposits, stocks, bonds, mutual funds, real estate: Where to invest my money?.
When the government or a corporation needs to raise cash, it may borrow from investors. A corporation can borrow privately from lending institutions using promissory notes. A corporation can also borrow publicly by issuing commercial papers which are registered with the SEC.
On the other hand, the government can borrow from the public through instruments such as treasury bills, notes and bonds.
Since debt instruments are normally longer-term investments, interest payments tend to be higher than term deposits.
A common stock is a unit of ownership in a corporation for which the holder can vote on corporate matters and receive dividends from the company’s earnings. Therefore, when the investor purchases a stock, he becomes a part-owner of the whole company.
Although investing in stocks involves higher risks versus investing in debt or money market instruments, you can take advantage of the higher earning potential that can be gained from stocks through capital appreciation and dividends. Furthermore, stock investments have in general outperformed bond and money market instruments over time.
An investment fund pools money from unrelated investors with similar investment objectives. The fund is managed by a portfolio manager who invests the money in a portfolio of securities and / or other instruments according to the specified investment objectives.
A fund offers several distinct benefits to investors:
- As a single investor, it may be difficult to achieve diversification. Funds enable you to purchase various types of securities and other instruments to build a diversified portfolio.
- The fund is managed by experienced professionals who have access to information on the economy and market movements.
- Through the fund, you can invest in a diversified portfolio, enjoying the same earnings potential from the securities that would have been accessible exclusively to institutional investors.
- Funds make it possible for investors to buy instruments at a lower cost. When the fund buys different instruments, the cost of buying these instruments is divided among all investors versus the sole investor bearing the total cost.