Types of Investment Products: Stocks, Bonds, Mutual Funds, and ETFs

Investors can choose from a wide range of investment methods and styles: mutual funds, ETFs, individual stocks and bonds, closed-end mutual funds, real estate, various alternative investments, and owning all or part of a business. Today, let's look at the different types of investment products.

Stocks

Buying stock lets an investor share in a company's success through the share price and dividends. Shareholders have a claim on the company's assets in a liquidation, but they do not own the assets. Holders of common stock have voting rights at shareholder meetings and are entitled to receive dividends. Holders of preferred stock have no voting rights, but they have priority over common stock when it comes to dividends.

Bonds

A bond is a debt instrument in which an investor lends money to a company or institution (the issuer) in exchange for regular interest payments, plus the return of the bond's face value when the bond matures. Bonds are issued by corporations, the federal government and many states, municipalities, and government agencies.

Bonds can be bought just like stocks. A bond's value can rise and fall depending on a number of factors, the most important of which is the direction of interest rates. Bond prices move in the opposite direction of interest rates.

Mutual Funds

A mutual fund is a pooled investment product run by an investment manager, which lets investors put their money into the stocks, bonds, or other investments specified by the fund. Mutual funds are valued at the end of the trading day, and orders to buy or sell shares are also executed after the market closes.

Passive mutual funds can track a stock or bond market index, such as the S&P 500 or the Barclay’s Aggregate Bond Index. In active mutual funds, the manager actively selects the stocks, bonds, or other investments. Actively managed mutual funds generally come with higher underlying costs.

Mutual funds let small investors instantly buy a large number of investment assets within the fund's investment objective. For example, through a foreign mutual fund, you can add 50, 100, or more overseas stocks to your portfolio.

ETFs

ETFs, or Exchange-Traded Funds, are similar to mutual funds in many ways, but like stocks, they trade on a stock exchange during the trading day. Unlike mutual funds, which are valued at the end of each trading day, ETFs are valued continuously while the market is open. Many ETFs track market indexes such as the S&P 500, the Barclay’s Aggregate Bond Index, and the Russell 2000 Index.

Alternative Investment Products

Investment products go beyond stocks, bonds, mutual funds, and ETFs. The best-known alternative investment is real estate. You can invest in real estate by buying commercial or residential property directly. Real estate investment trusts (REITs) pool investors' money and own property collectively. REITs trade like stocks. There are also mutual funds and ETFs that invest in REITs.

Hedge funds and private equity funds also fall into the category of alternative investments, but only those who meet the income and net worth requirements to qualify as accredited investors can participate. Hedge funds can invest in almost anything and may help preserve the value of existing investments in volatile markets.

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