- Bonds are debt instruments issued for a time frame of more than one year with the objective of acquiring capital by borrowing. Corporations as well as federal, state and local governments are the typical institutions that sell bonds.
Bonds typically offer a high level of security. U.S. government bonds are considered the safest in the world because the full faith and credit of the U.S. government stand behind them. And corporations must pay interest to their bondholders before they pay dividends to stockholders, so even corporate bonds are relatively safe investments. The best quality bonds are rated Aaa by Moody's and AAA by Standard & Poor's.
Tax-exempt bonds, also known as municipal bonds, are issued by states, local governments and certain public agencies. Earnings from these types of bonds are free of federal income taxes and from state and local income taxes if they are issued in your state. - Stocks are securities that represent fractional ownership of a company purchased as an investment. Stocks are generally riskier than bonds because stock prices tend to fluctuate more than bond prices. However, certain types of stocks are low-risk, pay generous dividends and offer long-term potential to grow in value. There is also a category of stocks that are higher risk known as growth stocks. These types of stocks rarely offer any dividends but have the potential for huge appreciation and impressive return on investment.
- Real estate has a variety of attractive attributes. For example, investing in residential or commercial property can produce steady income from rent, long-term appreciation and tax write-offs. The income and capital gains potential are what really make real estate worthy of consideration for any portfolio.
Real estate requires a small equity commitment, especially when compared with the stock market. In real estate, banks usually require only a 20 percent down payment, however, with stocks you need at least 50 percent. - Mutual funds are run by investment companies that pool funds from many investors to purchase a variety of securities. Mutual funds invest in several different securities, which offers diversification that you might not be able to afford on your own. You also get the services of full-time Wall Street professionals to manage the funds. Most mutual fund companies offer several different types of funds, so you are able to switch from one type of fund to another if your financial needs change or you want to further diversify.
- Exchange-traded funds, or ETFs, are portfolios of stocks, bonds, currencies or commodities that trade as a single stock on a stock exchange. ETFs are not mutual funds, but they offer some of the same advantages as mutual funds while trading like stocks.
ETFs hold a pool of securities and are structured to track a specific index, sector, currency or commodity. The major advantages of ETFs include reducing the market risk of owning individual stocks and allowing you to diversify your investments across a wide range of asset classes. - Certificates of deposit (CDs) are debt obligations issued by commercial banks, savings banks and credit unions. Maturities range from 30 days to several years, and the interest rates vary by issuer, time frame and amount invested, but they all reflect current market conditions. For example, a 30-day $2,000 CD will earn a far lower rate than a a five-year, $100,000 CD. Of all the investments, CDs are by far the safest, because they are protected by the Federal Deposit Insurance Corporation, commonly referred to as the FDIC, up to a certain value.
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