Types of Investments: Stock, Bond & Insurance
Stocks and bonds are the most common types of investments, although they serve different purposes. Investors in the stock market typically seek to grow their capital, while traditional bond investors are more concerned with protecting their assets. An example of an insurance investment is a life insurance fund that offers a component exposed to the bond or stock market as a way to enhance the eventual benefit. Choosing the appropriate investment types depends on an investor's financial goals as well as his ability to handle risk.
Stocks are equity investments that allow investors to share in the profits of corporations. Investors also share in the risk as stocks exhibit the highest amount of volatility among all of the asset classes. Bonds are traditionally safe investments that pay an interest rate assigned to the debt security and return the principal back to investors when the contract expires. When the stock and bond markets are underperforming, using insurance as an investment is an option. Investors typically pay more than the required insurance premium and then use the available assets to invest.
Stocks can deliver profits in a couple of ways: capital gains, which are advances in the market value of the security; and dividends, which are usually quarterly payments made to investors from the company. While stocks are issued by companies, bonds may be issued by corporations or government entities. Universal life and variable life insurance policies direct a percentage of policy assets into stocks and bonds.
All asset classes present some risk to investors. Investors turn to stocks and bonds to help them prepare for major financial milestones in life, such as retirement. When the stock markets go down, however, investors can lose large sums of money, including entire retirement accounts. The biggest risk with bonds is that since many pay very low rates of interest, they don't keep up with inflation. As for insurance, the purpose of a life insurance product is to provide an economic compensation when a life is lost. Policyholders run the risk of declining investments that diminish the size of the benefit to the payee when the money might be needed the most.
Investors have the option of buying stocks through a stockbroker or by investing in a mutual fund, which is an investment portfolio managed by professional managers. Bond investors might choose to purchase government bonds directly from the government, while corporate and municipal bonds are usually available through a broker or a financial adviser in addition to mutual fund firms. Licensed life insurance brokers sell life insurance products, which an investor might then decide to use as an investment vehicle on his own or with the help of the policy provider.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.