If you're to the point in life where you're ready to stop spending your money on jumbo cafe lattes and the latest electronic toys and start an investment program, there are many investment products that await your hard-earned dollars. In general, investments can be divided into either fixed-income or equity products. Your investment results can be very different depending on which type of product you select.
Equity investments usually consist of stocks that are traded on the stock exchanges, or stock mutual funds where the money of a large number of investors is pooled and spread over a number of different stocks. Fixed-income investments include vehicles like corporate or government bonds or bond mutual funds. Bank certificates of deposit (CDs) and savings accounts that feature a fixed interest rate are also considered to be fixed-income investments.
Equity Pros and Cons
Equity investing offers the potential for a larger return on your money than fixed-income investing. If you invested in the stock of a particular company that produces a popular new product or becomes highly profitable, you could experience a large return on your investment. On the other hand, if the company has a bad earnings year or files for bankruptcy, you could lose some or all of your investment. Investing in stock mutual funds is one way to mitigate the risk, as your money is diversified over a number of different stocks.
Fixed Income Pros and Cons
Perhaps the biggest advantage to investing in fixed-income instruments is the element of certainty, as you'll know exactly how much money you'll have at the end of the investment period. If you invest your money in bank products like savings accounts and CDs, your money is insured up to $250,000 by the Federal Insurance Deposit Corporation (FDIC). However, the low return on most fixed-income products can mean your investment might not even be able to keep pace with the rate of inflation, which in effect means that you're actually losing money in the long run.
The Right Choice
Whether equity or fixed-income products are right for you will be determined in large part by your tolerance for risk. If you're something of a riverboat gambler, you may prefer equity products. If you still have your first piggy bank and it still contains the first pennies you ever owned, the safer fixed-income track may be better for you. You can also strive for a balanced portfolio by investing in a combination of fixed-income and equity products.