Types of Investments

The sheer number of investments can seem overwhelming, but most of them can be grouped into three big categories: cash, debt, and equity.

• Cash investments are savings. When you buy an insured CD or a T-bill, you know you’ll get your principal plus interest back at the end of the term. The trade-off is that cash investments don’t offer much return.
• Debt investments are bonds. When you buy a bond, you’re actually loaning money to a company or government that issued the bond and promises to repay you the amount of the loan plus interest. Because the market price of a bond can drop, or a bond issuer can default and not repay, bonds are usually more risky than cash. But they’re less risky than stocks.
• Stocks are equity investments. When you buy stock you have a share of ownership in the issuing company. Stock returns are tied to the fortunes of the company and what’s happening in the overall stock market.

While individual stocks pose different risks and returns, all stocks have similar characteristics. The same is true of all bonds.

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