Understanding Investments: A Short Guide
  • Investments can be complicated but financial institutions regularly publish data to help customers understand them.
  • Once the basics are understood, investors should find a good news source and strategy that works for them.
  • Beginners are advised to diversify with purpose, really investigate the companies they invest in and invest with the intention of spending some serious time.

Most people at one point in time or another have been told to "invest" in something, a vague, candid comment that typically receives little deep thought. Most people would agree that it’s a good idea to invest but few people understand just the basics of investment decisions, investing or investment accounts. So what are the various kinds of investment accounts? What do they all means and how does one make a sound investment decision?

Investment 101: Different Types of Accounts

There are many types of investment accounts and this article will focus on some of the main investment types and the most common questions about them.

Mutual Funds

Mutual Funds combine money from various investors to buy securities. They’re managed by financial professionals and the investor has a chance to diversify their portfolio by investing in stocks, bonds, real estate and other assets both nationally and internationally.

Instead of trading individual stocks and bonds on their own, the investor can lower costs and risk by having portfolio manages to keep track of their investments and spread investments out over multiple securities, in case one does poorly.

Stocks

Stocks allow investors to purchase an ownership share in a company of their choice. The companies may offer dividends and capital gains and come from different industries and sectors. Stocks are actually a kind of security and by buying stock, the owners lay claim to some of a corporation’s assets because the stock represents ownership in it. To make money, investors can collect dividends or capital gains which accumulate as the stock (hopefully) appreciates in value.

Bonds

Often called fixed income securities, bonds represent government or corporation issued debt. The federal government, states, cities, corporations and other institutions sell bonds, which are IOUs for debts where principal and interest is supposed to be paid back. All bonds pay principal (only some paid interest) and when acquired by the investor, the investor becomes a creditor for the bond.

Annuities

Annuities are contracts with insurance companies and are typically used for long-term savings goals like retirement. They provide a steady income to investors who either make lump-sum payments or payments over their preferred period of time. After payments are completed, investors are paid by the insurance companies. The payout period for annuities can be set by the investor and can even be over the period of a lifetime.

How to Stay Informed

Deciding how much, with whom and when to invest are all vital to ensuring that investments can be made intelligently and staying abreast of investment news and one’s investment accounts are at the very heart of these decisions. Many online sources (like this one) provide updated, daily investment and financial news in language that has been translated from the complicated jargon one is likely to find in other publications. In addition, many financial institutions provide free introductory investment guides, one example is this guide provided by ING but there are others.

It’s also important that investors or potential investors understand their accounts as well as which accounts suit them. Fortunately, many banks provide information about investment products online in plain, customer-friendly language. With videos and short text explaining investments, even if one doesn’t currently invest in a certain financial institution, or invest at all, they provide great resources for information gathering. Many banks have an investment department or representative available to answer specific questions as well.

Beginning Strategy

This is a basic rundown on investment strategies, for more experienced investors who already have an investment strategy, an article about basic investing strategies may be more appropriate.

There are three main strategies that recur in beginner’s investment guides. The first piece of advice is to keep investments diversified. This goes back to the idea behind mutual funds of not concentrating all or much of one’s money into one particular company or stock. It also goes hand in hand with ensuring that professional investment managers or financial advisors trained to handle investments are there to assist.

The best thing is to have solid advice when it comes to diversifying. A counter to the fear of putting too much emphasis on one stock or product is that by investing in multiple areas, investors may have a harder time staying abreast of the changes happening with all the different companies they’ve invested in. This is a point brought up by Warren Buffet himself and that’s hard to argue with.

Another lesson from Buffet is to really understand investments before taking the plunge. For instance, investors should know how companies make a profit and their role in their specific industry. This also helps investors make better-informed decisions instead of rashly acting based on the news which may spell financial success or ruin for a company as either outcome largely hinges on a company’s track-record during past financial woes.

Finally, investors should be in it for the long hall. It may take years for stocks to pay off and banking on an easy buy and sale cycle depletes returns. Holding investments and selling after longer periods of time is a far more sound way of investing.