Types of Investment

Treasury Bills

All investments carry some risk, but the ones with the lowest risk are those issued by the US government. The Treasury invoice is the closest thing an investor will find to a "risk-free" investment. Due to the low risk, there are lesser returns.

Certificates of Deposit

The next step in the risk and reward series is a bank's certificate of deposit or CD. CDs are a type of limited-time savings account that can be used by almost all banks and credit unions. Like bank accounts, CDs are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, so there are no risks to this investment. However, it is arguable whether it is an "investment" product or a "savings" product.

Government Bonds

The next level of security scale is government bonds, which give access to all federal, state, and municipal bonds. Treasury bonds are the safest type of government bond, as state and local governments face financial difficulties and mismanagement that can jeopardize the repayment of government bonds. Government bonds are usually held by bond funds and fixed-income bond funds. T-bills and CDs offer low-interest rates, but some government bonds offer better yields. Backed by the US government's "full faith and credit," an investor can rest assured about not losing money on this low-risk investment.

Corporate Bonds

Corporate bonds are interest-bearing debt of multinational corporations. Bonds are owned by the majority of general investors through investment trusts, including exchange-traded funds (ETFs). Corporate bonds pay higher interest rates overall than government bonds, but they also carry higher risks. For example, if a company goes bankrupt, bondholders may not be paid in full. Bonds are assigned risk ratings by various rating agencies. At the most commonly used scale, AAA rated bonds are the safest. Junk bonds are high-risk bonds that can generate excellent returns when combined with a well-diversified portfolio. Bonds pay coupons. This is a monthly interest payment made over the life of a bond.

Preferred Stock

A preferred stock is a cross between a bond and a stock (more on that later). The holders of preferred shares receive a fixed sum every quarter, similar to a bond, except there is no expiration date. Preferred investors receive payouts after bondholders but before common stockholders in the event of a bankruptcy liquidation.

Common Stock

The most common sort of stock is common stock. Over time, a portfolio predominantly composed of various common companies tends to perform well. While stocks are more volatile than bonds and the other investments mentioned, the S&P 500 has historically returned roughly 10% per year over long periods of time.