There are two things in which most investors invest their money in: stocks and bonds.
A stock is a piece of paper that says you own a part of a company. With a stock, you have a claim on the assets of the company and voting rights. But you do have the risk of losing your investment if the company loses value or goes bankrupt.
A Common Stock
There are two types of stock, common and preferred. Common stock give you ownership and voting rights, but you are last on the list in gathering back your investment if the company goes bankrupt. Preferred stocks also give you ownership, but not as many voting rights. However, with preferred stocks you are able to collect your investment if the company loses value.
Bonds are less risky than stocks. Yet you can still lose your investment if the issuer defaults (refuses to pay you the interest you are owed on the bond until the maturity date). Bonds have a maturity date and can only be traded before this date, at which the bond expires.
A Seventeenth Century Bond
There are three kinds of bonds: bills, notes and bonds. A bill matures in less than a year. A note matures in one to ten years, and a bond in ten or more years.
Diversification of your investments can help reduce the risk of losing your investment in both bonds and stocks. This is one general rule of thumb that is commonly used to diversify.
- Subtract your age from 100
- Put the resulting percentage into stocks
- Put your age percent into bonds (the older you are the more bonds)
- Then invest 10 – 25% of your stock percentage in international securities
- Also take 5% of both your bond and stock percentages to invest in real estate investment trusts
For example: if you are twenty years old you would invest 80% in stocks and 20% in bonds. Then you would take 10% of the 80% (stocks) to invest in international securities. Finally you would invest 10% (5% of stocks, 5% of bonds) in real estate. The result: 75% in stocks (10% of which are international securities), 15% in bonds and 10% in real estate.
