A Review of Investment Vehicles
There are many places you can invest money. Major investment categories include: banks, securities (which includes stocks and bonds), and real estate. Each type of investment vehicle carries different risks which you need to understand if you are to invest intelligently.
Below are descriptions of popular investment vehicles to aid you in your decision making.
Savings Accounts (see banking)
Although a savings account is not an investment vehicle, it is actually the first place you should put money when you begin planning for retirement because it will be your safety net if you experience a financial crisis. You can set up a savings account at your local bank or credit union. A savings account is a liquid account which means that you can readily get money out whenever you need it. Savings accounts allow you to store money and gain interest at the same time (although the interest you earn in a savings account is minimal). The bank will use the money in your savings account for banking needs, and you will earn interest on your money for giving the bank the privilege to do so. Savings accounts have very low interest rates-typically just enough to keep pace with inflation. A low interest rate means it will take a long time for your money to grow, which is why savings accounts are not suitable for investing.
One benefit of a savings account is that your deposits are guaranteed by the US Federal Government up to $100,000 per account. So, if the bank goes out of business, you can be assured that your money will not be lost.
A security is an instrument that signifies ownership or rights to ownership. Securities issued by a corporation are called stock. Each stock certificate issued by a corporation represents fractional ownership in that company. Securities that confer the status of creditor upon the owner are called bonds. When you own a bond, the organization that issued the bond owes you money. Lastly, securities that represent the right to purchase or sell ownership are called options.
Because securities are documents that indicate ownership, they have value and, accordingly, can be bought and sold.
A money market account is similar to a savings account in that it is also a liquid account. It is a step up from a savings account however, because the funds in the account will be invested in U.S. Treasury bills, Certificates of Deposit (CDs) and liquid investments. A money market account has the lowest amount of risk of any investment, but the funds are not guaranteed by the government like a savings account. You can use a money market account to store larger sums of money that you might have a need to get access to quickly, such as an emergency reserve or rainy day fund. The interest rate on money market accounts will vary but it is almost always slightly better than the rate obtained with a savings account.
Certificates of Deposit (CD)
A certificate of deposit (CD) is like a savings account that gets locked for a period of time (several months to several years duration). During the period of time when the account is locked, you cannot access your money. Banks will sell you a CD and then use the money you put in that account for banking business. The rate of return (ROR--the interest you get paid on your investment) is higher for a CD than for a savings account because you agree to leave the money in the CD for a specified time (until the CD's maturity date). CDs are a low risk investment that offer fairly low rates of return. They are useful for storing money that you don't need now but will need in the foreseeable future, but are unsuitable for retirement investing (because they don't pay you enough to make the investments worth your while).