The investment world can sometimes be a little scary; although this course is not designed to give you investment advice, it will provide you with a basic understanding of investment vehicles. There are several levels of investments, and understanding risk and reward will help you determine what avenue to take based on where you are in life.

Remember where you begin is not set in stone, you can adjust the risk at any point in your financial journey.

Let’s begin with vehicle types:

• Saving accounts- A savings account can be opened through a bank or credit union; it is a basic type of financial product that allows you to deposit money and earn interest. The average rate is ¼% at a traditional bank but you may be able to secure a higher rate through a credit union or online banking institution.

• 401K- The 401k plan is an employer-sponsored retirement savings plan that offers significant tax benefits. Most plans provide an employer match of up to 3% on average; the key here is to contribute at a minimum up to the employer match rate. The funds come pre-taxed directly out of your paycheck and are matched by your employer, the benefit is the funds are not taxed until they are withdrawn at retirement at a significantly lower rate.

• Bonds- A bond is a debt security, like an IOU. Borrowers issue bonds to raise money and they mature over time. When you buy a bond, you are lending money to the issuer whether it be government, municipal or corporations they are considered low risk but offer lower returns.

• Mutual Funds- Mutual Funds allow investors to purchase many investments in a single purchase. They are diversified and provide investors with an avenue to tap into several business sectors while reducing the risk. When you invest in a mutual fund the money is pooled from all investors of the fund, you make money when the value of the fund increases either through stock dividends or bond interest.

• Stocks- A stock investment is when you buy shares in a specific company. Shares represent a small piece of that company’s earnings and assets. Companies sell shares to raise cash and investors buy and sell shares in hopes of earning high returns. Stocks are sold through the stock market exchange and can be purchased through stockbrokers. Stocks have more risk than other investments but can potentially have higher returns and some stocks pay dividends, which are paid out of company profits and paid on a quarterly basis. 

• Index Funds- An Index fund is a type of mutual fund that is not managed, it simply tracks an index. For example, the S&P index fund will aim to mirror the performance of the S&P 500 by holding the stock companies within the index. This type of mutual fund is generally cheaper to purchase because it does not have the costs associated with a fund manager. Index funds may earn dividends or interest and can be considered a moderate risk.

• ETF-Exchange Trade Funds are a type of index fund, the difference with this type of index is they trade on the exchange like a stock which means you can buy and sell throughout the day based on market fluctuations whereas mutual and index funds are priced once at the end of the day.

When making the decision to invest it is important that you understand risk and reward, one way to mitigate the risk is to always do your research.

Let’s take a closer look at the different vehicles.