Investment Basics: The Fundamentals
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You hear of many different types of investments, from mutual funds to unit trusts. But they are all derived from three basic asset categories:
* Cash
The great advantage of cash and cash equivalents is that funds are readily accessible, or liquid. Cash equivalents also maintain a high degree of liquidity, but allow you the potential to earn interest, returns and/or dividends. Certificates of deposit (CDs) and Treasury bills are two of the most common and widely used cash equivalents.
* Bonds
Bonds, meanwhile, are debt instruments issued by a company or government to finance a certain aspect of its operation. When you invest in bonds, you are essentially lending money to the bond issuer, entitling you to receive interest on that loan, and a repayment of principal when the bond matures. Bonds come in a number of incarnations, including U.S. Treasury bonds, municipal bonds and corporate bonds.
* Stocks
Stocks round out the basic asset classes. Shares of stock represent ownership in a corporation. Stocks fall under many categories, depending on the size of the company, its prospects, and the state of the markets. These categories include growth stocks, value stocks (based on potential for growth), and large-, mid-, and small-capitalization stocks (related to the size of the company).
Making the Investment Decision
Your main considerations as an investor, besides choosing which vehicles are right for you, lie in the areas of risk management, taxes and inflation, and asset allocation.
Risk
Risk is the possibility that you may lose some o ...