The Fundamentals of Investing

Your first house. Your kid's college education. A getaway near the coast.

Whatever your personal financial goals are, investing your money wisely is a key part of reaching them. To get started, you need a fundamental understanding of the various types of investment opportunities available. Aligning your choices with your goals and your personal situation will help ensure you're on the right path.

The Five Most Common Types of Investments

1. Stocks

Investing in stocks literally makes you a partial owner, or "shareholder," in a publicly-traded company. As the value of the company's stocks grows, so does the value of the stocks you own. Depending on the particular stock, you may also earn money through dividends, which are a percentage of a company's profit that is paid out to shareholders on a regular basis. Stocks carry more risk than more conservative investments like bonds, as they regularly fluctuate in value on a daily, hourly, or minute-to-minute basis. However, the upside is that stocks have historically beat inflation and interest rates over time — gaining, on average, about 8% annually. This makes them a strong portfolio choice for an investor who plans on holding them for several years or longer.

Important to know about stocks: For the vast majority of investors, experts say the best time to invest in stocks is sooner rather than later. “Stocks are for the long run," says Robert Johnson, chief executive officer at the American College of Financial Services. "If you have a longtime horizon for goals like retirement savings, invest in stocks as soon as possible."

2. Bonds

A bond is an investment where you essentially loan money to the issuer (typically a company or a government), and you earn interest on the amount you loaned or invested. Companies and government agencies issue bonds to raise the funds needed to build roads, invest in infrastructure, or conduct much-needed research and development. Bonds are rated by their quality and safety, which is based on the financial condition of the issuer. Bonds are a more conservative type of investment, usually paying out a fixed interest rate over the duration of the bond.

Important to know about bonds: “If you have a shorter time horizon and want to protect wealth, bonds are appropriate as they aren't as volatile as investing in stocks," Johnson adds.

3. Mutual Funds

Mutual funds allow you to "pool" your cash with other individuals to invest in a wide range of stocks and bonds. As a mutual fund shareholder, you'll share in any gains or losses in the fund. Because mutual funds allow you to invest in a variety of investments simultaneously, they're a great way to spread your investment risk while benefiting from the financial success of the companies included in the mutual fund. You can learn more about a particular mutual fund by thoroughly reviewing the fund's prospectus (essentially an owner's manual for mutual fund investors) that includes the fund's investment goals, strategy, fund manager, and fee structure, among other key features.

Important to know about mutual funds: As mutual funds tend to spread investment risk around, they're considered more conservative than individual stock investments. “In general, someone closer to retirement age will be allocated in more conservative investments (like fixed-income and mutual fund investments), and someone farther from retirement age will be allocated in more aggressive investments, like stocks," explains Kevin Kleinman, an investment manager with Blue Haven Capital and founder of Watchhimtrade.com.