What Are the 4 Most Common Investments?

Jennifer Wills
Aug 6
5 min read

I enjoyed educating clients on investing during my time as a licensed financial coach. The financial services industry can be confusing, and the investment options complex. Providing clarity helps individuals make informed decisions for themselves and their families, helping them reach their financial goals.

Understanding the four most common investments can help you along your journey to saving for the future. Working with a licensed financial professional can provide additional guidance and support.

1. Stocks

Stocks are a share of company ownership. If the company performs well, shareholders might receive part of the earnings as a stock dividend. Some stocks also provide owners with voting rights at shareholder meetings.

Publicly traded companies sell stock to raise capital. Investors can buy and sell shares among themselves to potentially earn income through stock value growth and dividends.

Advantages of Investing in Stocks

The advantages of investing in stocks include:

Potential income: Stocks held long-term can earn income from dividends and value growth. Shares sold above the purchase price can create profit.
High potential returns: Stocks typically offer higher potential returns than other investments.
Liquidity: Stocks can be quickly sold when needed.

Disadvantages of Investing in Stocks

The disadvantages of investing in stocks include:

Volatility: Sock returns can widely vary year to year.
Long holding period: Shares typically must be held long-term to receive potential returns.
Potential for loss: Because the stock market can go down, returns are not guaranteed. Companies can lose value or go out of business.

2. Bonds

A bond is a loan to a company or government to raise money. The issuer pays interest at regular intervals and repays the debt by a specific date.

The types of bonds include:

Treasuries: Bonds issued by the U.S. government have maturity dates between 1 month and 30 years. The 10-year note is used as a benchmark for the bond market.
Municipal bonds: City, municipal, and state governments can issue bonds to complete projects. For instance, a school district could issue bonds to pay for improvements.
Corporate bonds: Companies that issue bonds typically are given a credit rating, with AAA being the highest. Higher ratings indicate a strong likelihood of paying interest and repaying debt according to schedule.
Mortgage asset-backed bonds: Financial institutions can bundle mortgages, car loans, student loans, or other assets, issue bonds backed by these loans, and pass on the interest.
Zero-coupon bonds: The U.S. Treasury, state and local government agencies, and corporations sell zero-coupon bonds at a high discount from face value. When a bond matures, the investor receives the face value.

Advantages of Investing in Bonds

The advantages of investing in bonds include:

Regular income: Most bonds pay interest once or twice a year. Investors who desire regular income payments appreciate these fixed-income investments.
Potentially low risk: U.S. saving bonds are backed by the federal government, guaranteeing timely interest payments and debt repayment.
Potential tax advantages: Municipal bonds are tax-exempt at the federal level and often at the state and/or local level.

Disadvantages of Investing in Bonds

The disadvantages of investing in bonds include:

Potentially lower returns: Less risky investments typically offer lower returns than more risky investments. Also, bonds can decrease in value when interest rates increase.
Difficulty selling: Trading bonds is not as fluid as trading other investments.
Potential for loss: Companies or municipalities that issue bonds might experience financial challenges and not pay interest or repay the debt. Or, the issuers could buy back the bonds, canceling the interest payments.

3. Mutual Funds

A mutual fund pools investors’ money and employs a professional manager to invest in stocks, bonds, or other securities. Investors who purchase shares of mutual funds own shares of the underlying investments, which are outlined in the fund’s prospectus.

A mutual fund might invest in a specific type or mix of stocks or bonds that vary by industry or region. The fund’s risk level depends on the underlying investments.

When a mutual fund increases in value, such as through stock dividends or bond interest, a portion of the earnings is distributed to investors. When the underlying investments increase in value, the fund’s value goes up, and shares can be sold for a profit.

Actively Managed Mutual Funds

An actively managed mutual fund has an investment adviser select the stocks, bonds, and other securities in which the fund invests. The manager performs investment research and analysis to outperform a stock market index, such as the S&P 500, Standard and Poor’s stock market index that tracks the stock performance of 500 leading companies listed on U.S. stock exchanges.

Advantages of Investing in Mutual Funds

The advantages of investing in mutual funds include:

Professional management: A professional manager buys and sells the underlying investments to potentially generate profits.
Potential dividend reinvestment: Dividends can be used to purchase additional shares, potentially growing the investment.
Lower risk: Mutual funds are less risky than other investments because they are diversified across stocks, bonds, or other asset classes. Even if one or more of the underlying assets decrease in value, the others can increase in value.

Disadvantages of Investing in Mutual Funds

The disadvantages of investing in mutual funds include:

Minimum investment: Most mutual funds require a minimum amount to purchase shares.
Fees: Investors pay an annual fee, called an expense ratio, to own shares of a mutual fund. Some funds also have sales charges. Actively managed funds typically have higher expenses than index funds due to the additional research and trades, which reduce investor returns.
Trade limitations: Because trades are executed daily at the close of the market, shares cannot be purchased or sold in real time.
Potential for loss: Shares can lose value if the market or the underlying investments experience financial difficulties.
Taxes: Shareholders typically owe taxes on fund distributions.

4. Exchange-Traded Funds

An exchange-traded fund (ETF) is traded on the national stock exchange at market prices. Investors pool their money to invest in stocks, bonds, or other assets. Fund information, including the objectives, risks, costs, and potential performance, is included in the prospectus.

An ETF passively tracks an index rather than paying a manager to buy and sell the underlying investments. For instance, the goal of an S&P 500 index fund is to mirror the performance of 500 leading companies listed on U.S. stock exchanges by holding stocks of the companies within the index.

An ETF that earns interest or dividends distributes them to shareholders. The fund can increase in value when the value of the benchmark index it tracks increases. Investors can sell their shares for a profit.

Advantages of Investing in Exchange-Traded Funds

The advantages of investing in an ETF include:

Greater fund price control: Because an ETF can be bought or sold at any time, and the fund price fluctuates throughout the day, investors have more control over the purchase and sale price.
Lower costs: An ETF has a lower expense ratio and fewer costs than an actively managed mutual fund because there is no professional manager.
Liquidity: An ETF can be bought or sold on the stock market at any time.

Disadvantages of Investing in Exchange-Traded Funds

The disadvantages of investing in an ETF include:

Brokerage fees: A brokerage might charge a commission for ETF trades in addition to fund management fees.
Potentially lower returns: Investing in an ETF might provide a lower yield on asset gains than investing directly in the asset.
Variable risk: The risk associated with an ETF depends on the underlying investments.

*This information is for educational purposes only.