Know the difference between investments
Learn the key differences between the three common investment types: cash equivalents, bonds and stocks.
Chapter 5: Common investments
Cash equivalents, bonds and stocks are some common investments you're likely to see. Your personal time horizon might help you decide which investment to use.
What are cash equivalents?
Cash equivalents are short term government bonds with maturities less than 90 days.
Here are some examples of cash equivalents:
- Commercial paper
- Marketable securities
- Money market funds
- Short-term government bonds
What are bonds?
Bonds are loans you make to another entity. Bonds are considered a medium risk and reward.
There are several options when it comes to bonds, here are a few to consider:
- Corporate ― Corporate bonds are issued by public and private corporations.
- High-yield ― These bonds carry a higher risk with the possibility of a higher reward.
- Municipal ― Securities issued by cities, states, countries and other government entities.
What are stocks?
If you're planning to invest over a longer period of time, stocks are an option to consider. Stocks offer partial ownership in a public company. There are two main kinds of stocks: common and preferred.
- Common ― This type of stock allows owners to vote during shareholder meetings and receive dividend payouts.
- Preferred ― Stockholders typically don't have the voting rights but they do receive dividend payouts before common stockholders do. They also have priority over common stockholders should the company go bankrupt and liquidate its assets.
Refer to the downloadable Just the Facts: Investing worksheet to help you think through how to use these three investments.
Your chapter 5 checklist
- Watch the Common Investments video.
- Download the Just the Facts: Investing worksheet.
- Understand how different investments align with your tolerance profile and timing.
- Continue with the next chapter, Keeping your investments diversified.