Many children learn the importance of putting money aside for the future by dropping coins in a piggy bank. As kids grow older, piggy banks turn into savings accounts and birthday cash is supplemented by paychecks. While a savings account earns more interest than a ceramic piggy bank, many working adults may wish to maximize the return on their funds through various investments. Here are a few of those investment vehicles, explained:
- Bonds: A bond is an “IOU” of sorts. Those who buy bonds are loaning money to the bond issuer, which can be a government or corporation. Over time, bonds “mature,” or come due, meaning that buyers receive the original amount plus a fixed interest rate after this set period of time passes. These generally provide a predictable return on the original investment.
- Certificates of Deposit (CDs): Similar to a savings account, CDs are purchased from financial institutions and act as a loan to that institution, usually for a time between six months and five years. Unlike a savings account, CD holders cannot withdraw money until the CD’s maturity date (or else face a penalty), and at that point receive the original investment as well as the agreed upon interest.
- Stocks: Buying a stock is like buying a piece, or share, of a public company. A stockholder benefits from the successful growth of a company, which results in an increased stock price and larger dividend payments. While stocks offer a good chance for maximizing the return on investment, there is no guarantee a company will do well.
- Mutual Funds: Mutual funds are a cost- and time-effective means of pooling together money from a group of investors who wish to diversify their investments. Diversification means investing in stocks, bonds and other investment vehicles, and reduces an investor’s risk should one company perform poorly. Mutual funds are professionally managed and allow investors to “buy in” with only a few thousand dollars. There are many types of mutual funds, each with various kinds of investments and, therefore, varying degrees of yield (or earning potential).
For more information on these and other investment vehicles, visit Investor.gov.