Once your financial goals are set and asset allocation is determined, many different investment vehicles are available to achieve your objectives.

Stocks
A stock is a type of security that signifies ownership in a corporation and represents a claim on earnings. When you own a share of stock, you are a part owner in the company with a claim on every asset and every penny in earnings. Although individual owners don’t think of themselves as owners of the company, it’s this ownership structure that gives a stock its value; otherwise a stock certificate would be no more than a piece of paper. As a company’s earnings improve, investors are willing to pay more for the stock. The goal of stock ownership is for appreciation, and over time, stocks have outperformed cash and bonds.
Stocks are identified by their ticker symbol and are traded on exchanges all over the world, such as the New York Stock Exchange or NYSE (the largest stock exchange).

There are different types of shares including: common, preferred and unlisted. Common stock is most often referred to as ordinary shares and grants the shareholder a proportion of the company’s dividends, earnings growth and voting rights. In the event of liquidity or bankruptcy common shareholders are one of the last creditors to be paid. Preferred stock is a special stock that grants the holder priority over common stock holders in terms of dividends and bankruptcy rights. However, preferred shareholders do not have voting rights. The prices normally differ between common and preferred shares. Unlisted shares can be either common or preferred shares and are not listed on any stock exchange. Unlisted stock may pay higher dividends, however they may be less liquid than publicly traded stocks.

Bonds
A bond is a type of debt issued by a company to raise capital to expand its business. Bonds have a face value, a coupon rate and a maturity date. Bonds are issued to the public and investors buy them, collecting the original principal plus a predetermined interest rate when the bond matures at a specified date. Federal, state and municipal governments also issue bonds to raise money for public programs and projects.

Bonds may be more predictable than stocks, though they are not without risk. They carry credit risk, prepayment risk, interest rate risk and liquidity risk. If you have to sell a bond prior to maturity you risk losing capital that you would receive if you held it until maturity.

Municipal bonds are issued by a state, city or local government to fund municipal projects and offer tax advantages. The Federal Government does not count earnings from municipal bonds as part of taxable income, and bonds bought by a resident of the issuing state are typically exempt from taxes on the interest. This tax treatment helps incentivize individuals to invest in municipal bonds. However, yields on municipal bonds are often lower that other types of bonds because of the tax-free advantages.

Mutual Funds
Mutual funds are the most common type of investment for individual investors. If you own a 401(k), you most likely own shares of one or more mutual funds. Mutual funds are popular because they offer diversification for investors, allowing professional money managers to handle the buying and selling of individual stocks, bonds and other investment vehicles.

A mutual fund is controlled by a fund manager who invests money based on a strategy that is determined for each particular fund. A mutual fund manager buys stocks in several companies. Small investors benefit from the diversification of mutual funds, holding several types of assets with a mutual fund may reduce risk. In other words, many different types of investments in one portfolio decrease your risk of loss from any one of those investments. If you invested all of your money into one company’s stock and the company goes bankrupt, you would lose 100% of the money you invested.

Exchange Traded Funds (ETFs)
Exchange traded funds are traded on stock exchanges like stocks. They are invested in stocks, bonds, or commodities and most track an index such as the S&P 500 and MSCI EAFE. ETFs often have lower costs than mutual funds and are tax efficient because they generally have lower turnover than other securities. Only authorized participants, which are usually large institutional investors, buy or sell ETFs directly from or to the fund manager, and only in large blocks of shares. Other investors trade shares on the secondary market.

Derivatives
A derivative is a type of security whose price is dependent, or derived, from one or more underlying assets, usually stocks, bonds, commodities, currencies and interest rates. The most common types of derivatives include futures, options, forwards and swaps.