A large portion of investments can be categorized into two broad asset classes: equity and fixed income. Equity investments can be roughly equated with stocks and the stock market, while fixed-income investments are bonds, CDs and other interest-bearing securities. Investors should consider their own goals and risk tolerance when allocating investments between equity and fixed income securities.
Understanding Equity Investing ("Ownership Investing")
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Equity investing is also called ownership investing. Buying stock in a company gives the investor an ownership position in that company. Stock values fluctuate with the financial fortunes of the company and are also influenced by the trends in the overall stock market. Stock investments can range from stable, blue chip companies to speculative issues in pharmaceuticals, technology, mining or other sectors.
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The stock market can have periods of time where prices go up significantly and others where values fall. The long-term returns for stocks typically exceed those of fixed-income investments.
Consider also: How to Make Money in the Stock Market
Debt Securities and Other Fixed Income Investments
Fixed-income investments are usually debt securities. Governments and corporations borrow money by issuing bonds.
Bonds pay a set rate of interest per year and return the principal at maturity. Bonds can have maturities from 30 days to 30 or more years. U.S. Treasury bonds are considered to be the safest investment available, while high-yield, junk bonds have a significant risk of the issuer failing to pay interest or repay principal.
These types of investments can be a good option for investors who want to have a holding in their portfolio that is more stable than stocks, which vary in value significantly. In contrast, quality fixed-income securities can be counted on to payout at a set rate at maturity. Bonds may even have some tax advantages for investors if they are exempt from federal and state income taxes.
Consider also: How to Buy Stocks or Bonds for Beginners
Consider Different Types of Investment Options
The strong returns of stocks in a rising market are attractive, but an investor must be able to handle the times when the market is declining. The amount of risk in a stock portfolio can be adjusted by diversifying through multiple stock holdings or mutual funds. Stock market investing involves lots of research or the use of professional management through a financial adviser or mutual fund.
Fixed-income investments should be evaluated on the credit quality of the issuer, time until the bond matures and the yield to maturity – the annual return if held to maturity – before selecting specific issues for investment. Bonds can be more difficult to sell, and rising market interest rates will cause the market price of bonds to fall. A laddered bond strategy – a portfolio of bonds maturing at various intervals – or buying a fixed-income mutual fund allows more liquidity and diversification.
Consider also: What is Cash Equities Trading?
The key to successful investing is a balanced portfolio of equity and fixed-income investments. The asset allocation should be adjusted on a fixed schedule, automatically selling assets when prices are high and buying when they are low.