Major Types of Investment Vehicles
There are several types of investment vehicles, and each has different characteristics. Understanding the basic structure of each can help inform investment decisions.
Here is an overview of several common investment vehicles.
Stocks
What they are: A stock represents an ownership interest in a company. Investors may participate in changes in the company’s value through share price movement, and, when declared by the company, may receive dividends.
Potential benefits: Publicly traded stocks can provide liquidity because they are bought and sold on exchanges. Some stocks also pay dividends.
Key considerations: Stock prices can fluctuate, including over short periods, and investors can lose money.
Bonds
What they are: A bond is a debt security. When an investor buys a bond, the investor is lending money to the issuer, which may be a government or a corporation. The issuer typically agrees to pay interest and repay principal at maturity.
Potential benefits: Bonds are commonly used to provide income through interest payments and may serve a different role in a portfolio than stocks.
Key considerations: Bonds are subject to risks, including issuer default risk and interest rate risk.
Mutual Funds
What they are: A mutual fund pools money from multiple investors and invests it according to a stated strategy. This is often in stocks, bonds, or other securities.
Potential benefits: Mutual funds can provide diversification and professional management in a single investment vehicle.
Key considerations: Investors should review a fund’s objectives, risks, fees, expenses, and tax implications.
Exchange-Traded Funds (ETFs)
What they are: ETFs generally hold a basket of investments. Unlike most mutual funds, ETF shares trade on an exchange throughout the trading day at market prices.
Potential benefits: ETFs are commonly used for market, sector, or asset class exposure in a single investment.
Key considerations: Because ETF shares trade during the day, market prices can vary from the fund’s net asset value, and trading costs may apply.
Certificates of Deposit (CDs)
What they are: A CD is a bank deposit held for a fixed term and typically pays a stated rate of interest.
Potential benefits: CDs offer a stated rate of return for a defined period, and CDs issued by FDIC-insured banks are insured up to applicable limits.
Key considerations: Early withdrawals may result in penalties, and access to funds is limited during the term.
Real Estate and Other Tangible Assets
What they are: Real estate may be held directly, such as through rental property, or indirectly through vehicles such as REITs. Some investors also allocate to tangible assets such as precious metals.
Potential benefits: These assets may provide portfolio diversification depending on how they are used and structured.
Key considerations: These investments may involve valuation complexity, lower liquidity, and higher transaction or holding costs, depending on the structure.
Target-Date Funds
What they are: Target-date funds are diversified mutual funds or ETFs that typically become more conservative as they approach a specified target year.
Potential benefits: These funds combine multiple asset classes in one and adjust allocation over time based on the fund’s design.
Key considerations: Asset allocation, glide path, fees, and underlying investments vary by fund, and the target date does not guarantee a particular outcome.
No single investment vehicle is appropriate in all circumstances. Investment selection should reflect an investor’s objectives, time horizon, liquidity needs, tax considerations, and risk tolerance.
If you would like to review how your investments align with your financial plan, please reach out.
Sources
1. SEC Investor.gov, “Stocks.”
2. SEC Investor.gov, “Bonds.”
3. SEC Investor.gov, “Mutual Funds.”
4. SEC Investor Bulletin, “Characteristics of Mutual Funds and Exchange-Traded Funds (ETFs).”
5. SEC Investor.gov, “Certificates of Deposit (CDs).”
6. SEC Investor.gov, “Real Estate Investment Trusts (REITs)”; FINRA, “4 Tips to Know Before Buying Physical Precious Metals.”
7. SEC Investor Bulletin, “Target Date Funds.”
Emerald Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
