There are several types of investments you can buy, depending on your goals and your investing style. Here's how to decide.
Review the basic principles of investing
The first step in choosing investments is to know the principles that will help you achieve success. Then you'll be ready to narrow your investment options.
Start with your asset allocation. Of all the decisions you make, your asset allocation could have the biggest impact on the performance and volatility of your investments.
Don't let high costs eat away your returns. The amount you pay to invest has a direct impact on your returns.
Understanding asset classes
Think of these broad categories as the building blocks of your portfolio. They tend to act in different ways, so it's important to consider the right mix of assets for you. Here's what you should know about adding more detail to your asset allocation.
Mutual funds, ETFs & individual securities
These are the different ways to invest in an asset class. Once you know how you'd like your portfolio to fit together, you're ready to choose specific investments. Because diversification is so important in lowering risk, most or all of your portfolio should be made up of mutual funds or ETFs (exchange-traded funds), but you can also add individual securities.
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REFERENCE CONTENT
Asset allocation
The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments. Also known as "asset mix."
Performance
The measure of how much an investment has paid off, also known as return.
Volatility
The degree to which the value of an investment (or an entire market) fluctuates. The greater the volatility, the greater the difference between the investment's (or market's) high and low prices and the faster those fluctuations occur.
Bond
A bond represents a loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.
Stock
Usually refers to common stock, which is an investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.
Portfolio
The sum total of your investments managed toward a specific goal.
Risk
Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.
Returns
The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.
Mutual fund
A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.
ETF (exchange-traded fund)
A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.
Diversification
The strategy of investing in multiple asset classes and among many securities in an attempt to lower overall investment risk.