If you’re looking to invest or to expand your existing investments, you’re not alone. According to the Wall Street Journal, the percentage of Americans who own stocks is at an all-time high, with approximately 58 percent of U.S. households owning stocks in 2022, according to a study of consumer finances conducted by the Federal Reserve. This figure is up from 53 percent in 2019 and marks the highest household stock-ownership rate ever recorded in the triennial survey.
Stocks, of course, aren’t the only types of investments open to Americans, and today investors and would-be investors are arming themselves with the knowledge they need to save and invest effectively. To do so, it’s important to understand the differences between common investment products.
Stocks
Stocks represent ownership shares in a company, with common stockholders typically enjoying voting rights and a claim on the company’s profits and assets. The value of stocks can fluctuate significantly based on market conditions and company performance, offering the potential for high returns but also posing considerable risks. Companies may issue different classes of stock; common stocks, which allow voting on corporate matters, and preferred stocks, which usually lack voting rights but offer fixed dividends and have priority over common stocks in asset claims during liquidation. Additionally, stocks can be held directly, allowing personal control and voting rights, or indirectly through mutual funds or ETFs, where investors own shares of the fund rather than the underlying stocks. Some stocks are restricted or come as options, often part of employee compensation packages, which may have specific conditions or benefits attached.
Bonds
Bonds are issued by governments or companies and represent a long-term loan from the investor, who receives regular interest payments and the return of the bond’s face value at maturity. Bonds are generally seen as safer than stocks but typically offer lower returns. Treasury Bonds, issued by the federal government, offer tax advantages as their interest income is exempt from state and local taxes. Municipal Bonds, issued by local governments, provide tax-exempt income at the federal level, and sometimes state and local taxes, appealing particularly to those in higher tax brackets.
Mutual Funds
Mutual funds allow investors to pool their money to purchase a diversified portfolio managed by financial professionals. These funds can invest in stocks, bonds, or other assets and are valued at the end of each trading day. Mutual funds offer diversification and professional management but come with management fees that can impact returns.
Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. They offer the benefits of diversification and lower operational costs and can be bought and sold throughout the trading day. ETFs often track specific indices, sectors, or commodities, providing an efficient way to gain exposure to diverse investment areas.
Certificates of Deposit (CDs)
CDs are timed deposits made with banks that offer fixed interest rates over a specified period. They are FDIC-insured up to certain limits, making them a secure investment, though generally yielding lower returns compared to stocks or bonds. CDs are best for investors looking for guaranteed returns without exposure to market volatility.
Real Estate Investment Trusts (REITs)
REITs are companies that own or finance income-producing real estate across a range of property sectors. They offer investors regular income streams, diversification, and the potential for capital appreciation. Most REITs are publicly traded on major securities exchanges, and their tax advantage includes the requirement to distribute at least 90% of taxable income to shareholders as dividends.
Annuities
Annuities are financial products that pay out a fixed stream of payments to an individual, typically used as an income stream for retirees. They are divided into immediate and deferred annuities, depending on the payout timing. One significant tax advantage of annuities is that the money invested grows tax-deferred until withdrawal, which can be strategically planned for a period when the individual is in a lower tax bracket.
What Investment Products Are Right for Your Portfolio?
The ideal investments will depend on how much money you have to invest, how close you are to retirement, how much risk you can tolerate, and what you plan to use the money for. It’s a good idea to consult with a professional investment specialist before you get started or expand your investment portfolio.
Toomey Investment Management offers a client-centric approach to investing by focusing on individual financial goals. Our business model is designed to treat all of our clients equally and fairly. We realized long ago that the financial industry dedicated many resources to capture money from prospective clients but much less on service and accountability for existing clients. At Wallingford, Connecticut-based TIMI, we listen carefully, keep in touch, and return your calls and communications quickly, so you can count on us. Call us at 203-949-1710 or visit our website for more information.