Types of Investments
The chart below and the sections that follow highlight some of the different types of investments available. To find out more or to file a complaint, contact your state securities administrator (https://www.sec.gov/answers/statesecreg.htm), the Securities and Exchange Commission (https://www.sec.gov/) or the Financial Industry Regulatory Authority (http://www.finra.org/).
| Type of Investment | What is it? | Risk Level |
|---|---|---|
| Bonds and Bond Funds | These are also known as fixed-income securities, because the income they pay is fixed when the bond is sold. Bonds and bond funds invest in corporate or government debt obligations. | Low risk |
| Commodities | These are physical commodities, such as an agricultural product (grains) or a natural resource (gold). A futures contract is an agreement to purchase or sell a commodity for delivery in the future. (See more on this in the section below.) | High risk |
| Index Funds | These funds invest in a particular market index such as the S&P 500 or the Russell 2000. An index fund is managed passively and mirrors the performance of the designated stock or bond index. | Risk level depends on which index the fund uses. A bond index fund involves a lower risk level than an index fund of emerging markets overseas. |
| Market-Linked CDs (or Structured CDs) | Returns are linked to the future performance of a market index and may include stocks, bonds, foreign currency or other assets. These are designed for a long-term commitment (up to 20 years). | Medium to high risk |
| Money Market Funds | These are mutual funds that invest in short-term bonds. They usually pay better interest rates than a savings account but not as much as a certificate of deposit (CD). | Low risk |
| Mutual Funds | These invest in a variety of securities, which may include stocks, bonds and money market securities. Costs and objectives vary. | Risk levels vary according to the holdings in the mutual fund. |
| Traditional Individual Retirement Account (IRA) | A traditional IRA is a personal savings plan that gives tax advantages for savings for retirement. Investments may include a variety of securities. Contributions may be tax deductible; earnings are not taxed until distributed. | Risk levels vary according to the holdings in the IRA. |
| Roth IRA | This is a personal savings plan where earnings that remain in the account are not taxed. Investments may include a variety of securities. Contributions are not tax deductible. | Risk levels vary according to the holdings in the IRA. |
| Stocks | Stocks represent a share of a company. As the company's value rises or falls, so does the value of the stock. | Medium to high risk |
Commodities
Trading in commodity futures is different from investing. Commodity futures are an agreement to buy or sell a specific quantity of a variety of commodities such as precious metals, grains or other natural resources. Trading commodity futures and options is a volatile, complex and risky venture that is rarely suitable for individual investors or "retail customers." Before participating in the commodities market, check the registration status and background of the person and company at https://www.nfa.futures.org/basicnet.
Anyone who trades or gives advice to the public about futures and other derivatives must be registered with the National Futures Association (https://www.nfa.futures.org). The U.S. Commodity Futures Trading Commission (CFTC) provides additional information about how to protect yourself before and during trading in the commodities and options markets: http://www.cftc.gov/ConsumerProtection/index.htm.
Crowdfunding
Crowdfunding is a way for companies, entrepreneurs or artists to raise money. After setting a fundraising goal and deadline to reach that goal, the creator markets the campaign to potential backers, or investors. Before you contribute, do these things:
- Research the company. Is there any information available about the product or service the company wants to offer? Are there complaints related to the company or campaign creator with the state attorney general about fraud?
- Check if it's "all or nothing" or "flexible funding." If the campaign is an all-or-nothing campaign, the creator gets the pledged money only if the fundraising goal is reached. If the campaign is a flexible-funding campaign, the creator will receive all the donations, even if they did not reach the fundraising goal.
- Check the timing of payments. Does the fundraising website charge your credit card immediately after you pledge?
- Are there any rewards? What rewards, or returns, will you receive in exchange for your investment? Do you get to preorder the product that the company is producing? Are there different rewards, based on how much you invested?
- Can you get refunds? Are you able to get a refund if the company does not reach its fundraising goal or complete the project? If so, do you need to get the refund from the website or directly from the campaign creator?
- Do you have to pay taxes on this investment? Is your contribution tax deductible?
U.S. General Services Administration (GSA). (2016, January). Investing. In Consumer action handbook (pp. 34 & 36). Retrieved December 14, 2016, from https://www.usa.gov/