|Lesson: 5 Common - Types of Investments|
you invest, you buy something that you expect will grow in value and
provide a profit, either in the short term or over an extended
period. You can choose among a vast universe of investment
alternatives, from art to real estate. When it comes to financial
investments, most people concentrate on three core categories:
stocks, bonds, and cash equivalents. You can invest in these asset
classes directly or through mutual funds and exchange-traded funds
Many financial investments—including stocks, bonds, and mutual funds
and ETFs that invest in these assets—are legally considered to be
securities under the federal securities laws. Securities tend to be
widely available, easily bought and sold, and subject to federal,
state, and private-sector regulation. However, investing in
securities carries certain risks. That’s because the value of your
investment fluctuates as the market price of the security changes in
response to investor demand. As a result, you can make money, but
you can also lose some or all of your original investment.
Some cash equivalents, which you can exchange for cash with little
or no loss of value, may be securities, as U.S. Treasury bills and
money market mutual funds are—or they may be insured bank products,
such as certificates of deposit (CDs). Cash equivalent securities
expose you to less risk of losing money than stocks or bonds do, in
part because they tend to be very short-term investments whose
values tend to remain stable.
Issuing Stocks and Bonds
When corporations want to raise money, called capital, to expand
their businesses or provide additional services, they may issue, or
offer, stocks, bonds, or both stocks and bonds for public sale. A stock offering invites investors to buy an ownership
position in the company while a bond offering invites them to make a
loan in exchange for the promise of repayment in full plus a certain
rate of interest for the use of the money.
Similarly, federal, state, and local governments may issue bonds if
they want to raise money to pay for new projects or supplement their
tax revenues to pay for day-to-day operations.
When a company sells stock for the first time, it’s called an
initial public offering or IPO. A company may also make a secondary
or follow-on offering to sell additional shares of its stock to the
pubic. In the case of
bonds, each time bonds are sold to the public to raise money they’re
called new issues. Once
these public offerings take place, the capital raising is complete
and the stocks and bonds trade in their respective secondary
markets. The issuing organization does not receive any additional
money from secondary transactions.
Public offerings in the U.S. must comply with the federal securities laws and the rules of the Securities and Exchange Commission (SEC). In addition, there are often additional state laws that apply to public offerings, as well as rules imposed by the market in which the offering ultimately trades.
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