Once you’ve decided to begin investing your money, the next step is to figure out where you will invest. In this guide, we’ll look at the four most common types of investments, and discuss the benefits and risks associated with each of them.

Stocks
When you buy stock, you’re buying a piece of a company called a share. That purchase makes you a shareholder, someone who is entitled to a small piece of the profits when the company does well. These profits are called dividends.

While it’s great to earn dividends on stock, dividends themselves typically aren’t the primary reason why people invest in the stock market. Because stock prices fluctuate constantly, the key to making money with this type of investment is to buy or sell stock when the time is right: to buy when prices are low, and then re-sell when prices go up, for instance.

This is why stocks are one of the most common types of investments. The stock market typically grows 10 to 12 percent every year, and with growth like that, there’s potential to see a great return on your investment. But there’s also just as much potential to lose money, which is why stocks can be risky, as well.

Bonds
Bonds are another common type of investment. When you buy a bond from the government or from a company, you are essentially loaning your money to them. These organizations issue bonds in order to raise money for themselves. In return for being a bondholder, you get a promise that you’ll be paid back the principal (the original amount of the bond) after the bond reaches maturity. You’ll also receive interest payments at regular intervals.

Compared to stocks, bonds are less risky because they provide a stable flow of income. However, as bonds are a relatively stable investment, the return on these investments is usually lower than with stock.

Cash equivalents
Cash equivalents are different from the other types of investments we’ve discussed. “Cash equivalents” is an umbrella term describing investments that are short-term and liquid, meaning that they’re easy to convert to cash.

Here are some common types of cash equivalents: 

• CDs — CD stands for Certificate of Deposit (not compact disc!) With this type of investment, you agree to put money aside in the bank for a short amount of time (usually three, six, or twelve months). During that time, you cannot touch the money, but you’re paid interest for allowing your money to be “tied up.”
• T-bills — T-bill stands for Treasury bill, a short-term investment offered by the U.S. government. When you buy a T-bill and hold onto it until its maturity date, you are guaranteed to earn a certain interest rate.
• Money market accounts — Money markets are funds typically invested in a number of short-term liquid assets like T-bills and CDs.

The benefit of investing in cash equivalents is that they are very low risk. They offer a stable rate of return, protect your original investment, and allow you to have easy access to your money. But the drawback is that the rate of return is usually so low (especially after paying taxes) that they are not good long-term investments.

Mutual funds
Mutual funds offer investors a way to diversify. When you buy shares in a mutual fund, your money is pooled together with money from other investors and then invested by a professional fund manager. When you invest in your company’s 401k program or in a Roth IRA, typically, your money is placed into some combination of mutual funds.

Mutual funds typically invest in a number of different stocks and bonds. This helps reduce risk for the investors if any single part of the portfolio performs poorly. Because mutual funds offer modest money-making potential with relatively little risk, these funds are considered the wisest and most common way to invest for the long term.

Invest with confidence
When it comes to investing your money, making educated choices is important. A little bit of research can help you grow your money in the wisest ways available to you.