There are two types of investments: ownership (also known as equities) and loanership. When you buy "ownership" assets, you have an influence on company decisions or you make decisions directly as you set rent prices for property that you own. You also share directly in any financial loss or gain. There are no guarantees about your earnings or the value of an equity investment (e.g., stock and growth mutual funds).
When you buy "loanership" investments, you loan your money to an entity (such as a bank or corporation or the government) and get an agreed-upon return. An example is earning 4.5% on a bank CD or a bond.
Ownership investments have potential for a high rate of return, but also potential for loss of principal. The particular investment you make influences the amount of risk you assume. For example, if you buy stock in a company that is offering a brand new, untested product, there will be more risk than if you buy a home in a well-established subdivision.
Two examples of risks associated with ownership investments are:
business risk--the risk that events affecting a specific company or industry will affect the value of your investment; and
market risk--the risk that the price of securities will be affected by the volatility (i.e., swings in prices) of financial markets.
One of the most popular types of ownership investments is stock. With common stock, investors buy shares of stock in a company. Those who own stock elect directors, who people to manage the company on a day-to-day basis. Owners also may vote on other issues that come before the directors. When a stock is worth more when you sell it than when you bought it, you have a capital gain. If it is worth less, you have a capital loss. Boards of directors may reinvest money earned in the company or pay dividends to stockholders quarterly or annually.
Ibbotson Associates, an investment research firm in Chicago, reports that stocks have, historically, outperformed other asset classes. This is particularly true in time periods of 10 years or longer, which makes stocks most appropriate for long-term financial goals (e.g., retirement).
There are many ways to purchase stock. In addition to brokers, you could purchase stock directly from companies. Direct purchase plans (also known as DPPs or "no load stocks") are stocks sold directly to shareholders, so they can save on brokerage commissions. Various fees may be charged, however. Be sure to inquire. A good resource for direct stock purchases is the Web site www.netstockdirect.com. You also could join an investment club or invest via the Internet with an online brokerage firm. The downside is that there is no expert available to personally discuss your investment choices.
Two recommended stock investing strategies are dollar-cost averaging and "buy and hold." Dollar-cost averaging means investing the same amount on a regular basis (for example, $50 every month). Dollar-cost averaging works best if investments are "automated," such as 401(k) plan payroll deductions or debiting a bank account monthly for mutual fund share purchases. Buy and hold means investing in stock (particularly from established companies with a history of steady earnings or growth) and keeping it for a number of years.