Video: Investment Securities That May Help You Grow & Preserve Your Wealth February 24, 2021
Investment Securities That May Help You Grow & Preserve Your Wealth
Are you interested in making an investment and cannot figure out what to buy?
Hi there, this is Blaine Carr, and today I’d like to provide a quick explanation of the major types of investments you can purchase to help grow and preserve your financial wealth.
The investment universe is limitless so I am going to focus on liquid investments that you can hold in an account. At a high level I’ll classify these investments as cash, bonds, and stocks.
- Cash is the investment you are probably most familiar with. When you put cash into an account with a bank it typically is in the form of checking, savings, money market, or a certificate of deposit. These investments earn interest, but otherwise the value stays stable. When the market rate of interest is high, banks will pay you more interest. Investing in cash is generally considered low-risk.
- Bonds are similar to cash, yet carry a bit more risk. Organizations issue bonds to raise money for projects and other expenses. These loans get paid back over time, with interest. Each bond is issued for a specified term and interest is generally paid at a fixed rate. Bond values can fluctuate, but most of the return comes from interest collected. Investing in bonds does contain risk. If the borrowing organization runs into financial trouble the price of that bond can decrease and possibly drop to zero.
- A share of stock represents an ownership stake in a company. An investment in stock is made with the expectation the company will be profitable, appreciate in value, and possibly pay out a portion of earnings in the form of a dividend. The price of a stock will decline if a company delivers poor financial results. Sometimes a company might be doing fine, yet a poor economy or a catastrophic event might cause the overall stock market to become less attractive to investors. This is known as market risk and can result in most stock prices dropping at the same time. Stocks are generally considered riskier investments than bonds and cash, but you should expect to be compensated more over the long-term for taking this risk on.
You can invest directly in cash, bonds, or stocks, but don’t put all your eggs in one basket. It is recommended that you diversify by purchasing a variety of bonds and stocks. If a company struggles or goes bankrupt, you will have a lower percentage of your investments tied to that specific company. A common way to diversify is to invest in a mutual fund or an ETF. These are investments which diversify by purchasing tens, hundreds or even thousands of different stocks or bonds so that you can keep things simple and still be diversified. Mutual funds and ETFs are a good way to purchase stocks and bonds, but you need to understand what types of stocks and bonds these funds are holding.
Okay, to summarize, cash is the lowest risk and pays you interest. Bonds carry a bit more risk and generally pay you more interest. Stocks contain even more risk and deliver an even higher rate of return over the long term. A well-diversified portfolio will contain some cash, along with bonds, and stock of multiple organizations.
As always, you should check with your experienced wealth manager prior to buying and selling investments. Please share this with your friends and family. Also, I encourage you to check out our additional insights at www.petersenhastings.com. See you next time.