If you're new to the investment world, the sheer number of investments available to you can be overwhelming. And what's more, the differences between investment types like stocks, bonds and annuities are not always easy to understand. Before you visit with your financial adviser and start investing, it's important to know the basics about these very different investment types.
When you invest in stocks, you purchase a percentage of ownership of a publicly held company. Depending on the company’s earnings, the value of your stock can change. When the company’s earnings increase, the value of your stock increases. Likewise, if the company performs poorly, your stock value will go down. Stocks can be risky, but they generally offer a higher return in the long run. Working with a qualified financial adviser is important when determining which stocks are best for you.
When you purchase a bond, you are essentially providing a loan to the issuer, which may be a bank, corporation or the government. These organizations sell bonds in order to fund special projects; in exchange for your loan, you receive a fixed interest payment each year. Bond prices change depending on interest rates. When interest rates go up, bond prices go down; if interest rates fall, bond prices increase. The benefit of bonds is that the interest rate determined when you purchased the bond, also known as the “coupon,” always stays the same. When you purchase bonds, you begin to collect interest on them. You also receive a stated maturity date when the bond’s earnings will be disbursed to you. Bond rates usually remain more stable than stocks and are considered safer investments.
Annuities are issued by insurance companies and are one of the most popular retirement investments. They allow investors to accumulate tax-deferred money and withdraw it when it’s needed. There are three main types of annuities. Fixed annuities guarantee the investor a fixed interest rate for a certain period of time determined by your contract. Variable annuities are a collection of investments whose earnings are tax-deferred. Earnings levels change depending on how well the market performs and the level of risk involved in your investment choices. Indexed annuities are also tax-deferred; their growth depends on how well equity markets perform. They have guaranteed minimum interest to help investors reach retirement goals.
When considering any investment, it’s important to work with a qualified financial adviser. Make it clear to your adviser how much risk you are comfortable with and ask questions about anything that is unclear to you. Work with your adviser to create a well-rounded portfolio that's right for you.
Megan Martin has more than 10 years of experience writing for trade publications and corporate newsletters as well as literary journals. She holds a Bachelor of Arts from the University of Iowa and a Master of Fine Arts in writing from The School of the Art Institute of Chicago.