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

Video Transcript

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

Securities distributed by State Farm VP Management Corp.

Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates.

Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.

Neither State Farm nor its agents provide tax or legal advice.


Start a Quote
Select a product to start a quote.
Agents Near You
Contact Us

Also important

Comparing Risk of Investment

Not all investments are the same. With a little preparation, you'll get a better understanding and appreciation of how much to invest and where.

Figure Out Your Investing Risk Tolerance

Learn how your current stage of life and appetite for risk play an important role in determining the optimal investment strategy.

Related articles

Keeping Your Investments Diversified

If you're looking to balance or mitigate the risk levels in your investments, diversification is your best option.

Investing 101: Get Started Today

Unsure of how to start investing? We have a series of helpful videos that can equip you with the tools and education you need to being on the right path to grow your money.

When Should I Start Investing

If there's one thing financial experts agree on, it's this: It's never too late to start investing. Get the extra push you might need to put your money to work for you.