Types of investments — Part 1

Before you invest, it’s important to understand the basics about different types of investments.

Low-risk investments
Low-risk investments enable you to earn interest on your money while maintaining some liquidity –- in other words, flexible access to your cash. The odds of losing your money through these investments are extremely low, but they also have lower potential return compared to higher-risk investments like stocks. Common examples include Certificates of Deposit (CDs) and Money Market Deposit Accounts (MMDA).

Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are a type of low-risk investment that can be opened with an initial deposit of as little as $1,000. With CDs, you agree that you won’t touch the money you deposit for a specific period of time (from a few days to a few years). Generally, the longer you keep your money in the account, the greater your rate of return.

Money Market Deposit Account (MMDA)
A Money Market Deposit Account (MMDA) is a low-risk investment. It’s a form of savings account that requires a larger balance than CDs or regular savings accounts, usually $10,000 or more. Compared to regular savings accounts, MMDAs offer a better interest rate and allow you more flexible access to the funds in your account.

Investing in stocks is risky because their value can change from day to day. But stocks can also have great potential for growth and total return. When you invest in stocks, you’re investing in businesses. These could be small, medium, or large companies in the U.S. or around the world. Buying stock gives you part ownership in a company. That’s why you should only buy stocks in companies you believe in, and believe can do well.

A close-up of a newspaper showing the Dow Jones Industrial Average.

What are “shares” and “dividends”?
Stocks are usually bought and sold in units called shares. A share’s value, or share price, rises and falls based on how much people will pay for a share. People will pay money for the stock if they think the company will be successful. If it is, its stock will increase in value. Sometimes the company will also pay its investors a dividend. That’s when the company pays the shareholders a part of its profits.

Mutual funds
A mutual fund is a professionally managed collection of money from a group of investors. Instead of deciding for yourself what stocks or bonds to buy, a mutual fund manager makes these decisions for everyone in the group – deciding what to buy or sell, and when. Some mutual funds will be higher risk than others, and no mutual fund is a sure thing.

Risk vs. reward with mutual funds
Because a mutual fund invests in a variety of stocks, bonds, and other products, there is usually greater potential reward than many low-risk investments, and less risk than buying individual stocks and some bonds.

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