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Investing Basics: Types of Investments

By Christina Kilroy

December 23, 2019

As part of the ICI Education Foundation’s 30th anniversary celebration, we will be sharing a series of ICI Viewpoints explaining basic concepts of investing, drawn from the ICI Education Foundation’s Investing Road Trip.

Two of the most common investments are stocks and bonds. Chances are if you own a portfolio of investments, those two types of assets make up a significant part—or perhaps all—of it. For those who want to start investing, it’s essential to understand these common portfolio building blocks. Both stocks and bonds are types of securities, which means they are financial assets that can be bought and sold. And like all investments, they carry opportunities for earning returns, as well as risks.

Of Good Stock

A stock is an ownership share in a company—usually a tiny share. (If you currently own one share of Apple stock, that would be about 0.00000002 percent of the company’s outstanding shares!) Owning even a tiny part of a company entitles a shareholder to a corresponding share of the profits that a company pays out (called a dividend) and to a proportional vote in shareholder meetings. If the company’s value rises, so does the price of its stock and the value of an investor’s holdings.

Stocks are liquid—they can be easily bought and sold while the market is open and are priced continuously throughout the trading day. Stocks can be volatile, with prices moving sharply up or down, depending on any number of factors—including the company’s financial health, a change in interest rates, economic and political events, and even a natural disaster that may affect the company’s operations.

Despite these risks, stocks attract investors because they present an opportunity for shareholders to participate in the growth of a company over time. (Amazon stock, for example, has increased an eye-popping 495 percent in the last five years!) Of course, money invested in stocks is not guaranteed, and if a company struggles or goes bankrupt, its shares could lose some or all of their value.

A Strong Bond

A bond is a loan. A borrower (typically a company, government, or municipality) issues bonds through the market to investors. The bond issuer promises to pay bondholders back at a future date, along with regular interest payments while the debt is outstanding. Bonds can be particularly attractive for those interested in receiving a regular stream of income from an investment, such as retirees.

Bonds are typically less volatile than stocks, though they too can lose some or all of their value. The price of bonds can be affected by changes in interest rates. If interest rates rise, bond prices fall; if interest rates fall, bond prices rise.

Other factors that can affect the price of bonds are an issuer’s creditworthiness (known as credit risk) and the possibility that an issuer may pay off the debt sooner than promised, causing the bondholder to miss out on future interest payments (prepayment risk). Bond investors should also consider inflation risk, which is a factor when the overall cost of goods rises faster than an investment’s growth. If a bond issuer does go bankrupt, bondholders are typically paid first (stockholders are typically paid last, if at all).

The Sky’s the Limit…

Stocks and bonds are a good place to start learning about investing, but they are by no means the only investments available. Investors arguably have more options for where to put their money than ever before. Today, you can invest in pretty much anything, from Bitcoin to bullion to Beanie Babies.

…But Just Because You Can Doesn’t Mean You Should

While some might be tempted to chase wild investing fads and others might want to stick all their money under the mattress, neither approach is wise—a more measured approach is probably the best bet. Of course, what that means will depend on the individual investor.

Most investors buy a mix of assets—stocks, bonds, real estate, and commodities. That reduces their risks in two ways: they’re not vulnerable to problems that might befall a single company or bond issuer, and they can count on different asset classes to behave differently as markets change. For example, stocks historically have gone up in value when bond prices fall, and vice versa.

One way to spread those risks is by investing in regulated funds. In the United States, many investors—more than 100 million, in fact—own regulated funds, such as mutual funds and exchange-traded funds (ETFs).

Mutual funds and ETFs hold a diversified pool of investments, such as stocks, bonds, or other financial assets, and offer a simple option for investors. By buying shares in a mutual fund or ETF, investors gain access to all the stocks or bonds that the fund holds in its portfolio. Mutual funds continue to be popular investments because they offer professional money management and a diversified portfolio at a reasonable price.

We’ll look more closely at the concept of diversification and the benefits of mutual funds and ETFs in future posts.

Putting It All Together

Choosing the right mix of investments is highly specific to the individual. A portfolio’s risk profile and investment objectives should fit with the investor’s personal risk tolerance, investing goals, and other investments. When those things align, it’s a match.

Other Posts in This Series

  • Investing Basics: What Is Investing?
  • Investing Basics: What Is Risk?
  • Investing Basics: Types of Investments
  • Investing Basics: Diversification
  • Investing Basics: Dollar-Cost Averaging
  • Investing Basics: The Benefits of Mutual Funds
  • Investing Basics: Tax Benefits to Encourage Saving
  • Investing Basics: 529 Savings Plans
  • Investing Basics: Compound Returns and the Power of Reinvestment

Christina Kilroy is vice president of the ICI Education Foundation.

Permalink: https://www.ici.org/viewpoints/19_view_icief3

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

“A Leader in Every Way”: Amy B. R. Lancellotta

By Dawn Vroegop

December 16, 2019

In a letter that was released in ICI’s 2019 Annual Report to Members, IDC Governing Council Chair Dawn M. Vroegop recalls the tenure of Amy B. R. Lancellotta, the long-serving managing director of IDC, who will retire at the end of this month....

Read more…

TOPICS: IDC

Talkin’ ’Bout the Generations: ICI Research on Mutual Fund Ownership by Generation

By Michael Bogdan and Candice Gullett

December 11, 2019

Talk about the differences between generations is a hot topic in today’s cultural conversation. And the Millennial and Baby Boomer generations are in the middle of a little generational warfare. But when it comes to owning mutual funds, are there really that many differences? 

Read more…

TOPICS: 401(k)Equity FundEquity InvestingIRAInvestor ResearchMoney Market FundsRetirement ResearchSavings

Investing Basics: What Is Risk?

By Christina Kilroy

November 26, 2019

You invest with the hope of earning a return on your investment. That opportunity invariably involves risk, including the possibility of losing some or all of the money you invested. Understanding these risks is an essential step toward successful investing.

The second installment of the ICI Education Foundation's blog series celebrating its 30th anniversary explores different types of investing risks.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

2019 Annual Report to Members: ICI's International Work

By Miriam Bridges

November 21, 2019

With the industry's interests bound ever more tightly to global trends, ICI pursues an active international agenda through its international arm, ICI Global. ICI’s international work in 2019 was a period of vigorous effort on a host of issues....

Read more…

TOPICS: CybersecurityExchange-Traded FundsFinancial MarketsFinancial StabilityGlobalICI GlobalInternationalOperations and TechnologyRetirement Policy

ICYMI: A Q&A with Members of ICI's Retirement Team

November 19, 2019

For this year's 2019 Annual Report to Members, four members of ICI's retirement team sat down to discuss ICI's legislative, regulatory, research, and communications activities to advocate for well-informed public policies that help Americans prepare for retirement....

Read more…

TOPICS: 401(k)Fund RegulationGovernment AffairsMutual FundRetirement PolicyRetirement ResearchShareholder

2019 Annual Report to Members: A Letter to ICI's Membership

By George C. W. Gatch and Paul Schott Stevens

November 14, 2019

What follows is an abridged version of a letter by ICI Chairman George C. W. Gatch and ICI President and CEO Paul Schott Stevens that was released in ICI’s 2019 annual report. To read their full letter, please see ICI’s 2019 Annual Report to Members....

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGlobalGovernment AffairsICI GlobalIndex FundInternationalInvestor ResearchMutual FundPolicy ResearchRetirement PolicyShareholder

Closed-End Funds: Opportunities for a True Renaissance

By Dorothy Donohue and Kenneth Fang

November 5, 2019

Closed-end funds are in vogue once again. Legislators, regulators, and fund sponsors are turning to the structure as a promising vehicle for retail investment and capital formation. And recent government actions are positive steps that can lead to a deeper pool of closed-end funds. With a few critical tweaks, this legislation and related regulatory action could stimulate further growth and better deliver on that promise....

Read more…

TOPICS: Equity FundFund RegulationShareholder

Investing Basics: What Is Investing?

By Christina Kilroy

October 31, 2019

This month, the ICI Education Foundation celebrates 30 years of developing, delivering, and promoting investor education. As part of our yearlong celebration, we will be sharing an ICI Viewpoints post each month that explains a basic concept of investing, drawn from the ICI Education Foundation’s Investing Road Trip.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Five Key Points on 401(k) Plan Fees from ICI Research

By James Duvall and Steven Bass

October 23, 2019

Thanks to innovation and a competitive market, 401(k) mutual fund fees keep falling. ICI has a window into this information through our study of the cost of providing 401(k)s, in which we take a close look at the expenses and fees of mutual funds incurred by 401(k) plan investors, and in related research on fund fees through a collaborative research effort between ICI and BrightScope.

Read more…

TOPICS: 401(k)Equity InvestingMutual FundRetirement ResearchShareholder

The ETF Rule: Paving the Way for Further Growth and Success

By Jane Heinrichs

October 10, 2019

For tens of millions of Americans, mutual funds and exchange-traded funds (ETFs) are the most convenient, cost-effective, transparent, and well-regulated tools available to meet their important financial goals. Both investment vehicles are governed by the Investment Company Act of 1940, but ETFs have long needed their own set of uniform regulations under the Act. 

The SEC rightly recognized this by recently adopting Rule 6c-11—otherwise known as “the ETF rule.” The SEC’s rule is the next step in the evolution of ETFs and will foster greater transparency, innovation, and competition, enabling more investors to realize their benefits.

Read more…

TOPICS: Exchange-Traded FundsFund Regulation

Operations Managers Identify Technology as Key to Future Success

By Ahmed Elghazaly

September 24, 2019

How are asset managers investing in the future? To help answer this question, Accenture conducted a joint study with ICI and released a report highlighting the growing importance of technology to successfully navigate the changing tides in the asset management industry. Whether it’s the cloud, data management, artificial intelligence, or robotic process automation, the study found that the right technology is key to gaining and maintaining an edge in the years ahead.

Read more…

TOPICS: Operations and Technology

Celebrating 15 Years: Join IDC for a Special Fund Directors Conference in October

By Amy B. R. Lancellotta

September 24, 2019

IDC’s Fund Directors Conference is always an important event for the fund director community, but this year’s gathering will take on special meaning. On October 21–23 in Chicago, we’ll mark 15 years of supporting fund directors’ work on behalf of fund shareholders—by taking stock of how fund governance has evolved, surveying today’s industry and regulatory landscape, and contemplating the road ahead.

Read more…

TOPICS: Fund GovernanceIDC

Four Wrongs Don’t Make a Right—A Financial Stability Proposal Falls Short

By Susan Olson

September 16, 2019

After the global financial crisis, the Dodd-Frank Act of 2010 set up a regulatory framework to identify and mitigate threats to financial stability. Since then, regulators and industry have taken many actions to make financial markets and market participants more resilient. Yet a new proposal calling for further reform fails to take this progress into account, instead offering an action plan that’s likely to create—not solve—problems in promoting financial stability. 

Read more…

TOPICS: Financial MarketsFinancial StabilityFund Regulation

Happy Birthday, IRA! Congratulations on 45 Years

By Sarah Holden and Elena Barone Chism

September 12, 2019

Labor Day 2019 marked the 45th birthday of the individual retirement account (IRA). When the Employee Retirement Income Security Act was signed into law on September 2, 1974, it introduced bold steps to safeguard Americans’ employer-sponsored pensions and created the IRA.

Forty-five years later, IRAs are a significant component of US households’ retirement assets, holding $9.4 trillion in assets, or about one-third of the total US retirement market, at the end of March 2019…

Read more…

TOPICS: IRAInvestor ResearchMutual FundRetirement ResearchSavingsShareholder

Three Bs or Not Three Bs: Revisiting Claims That Investment Grade Corporate Bond Funds Pose Financial Stability Risks

By Shelly Antoniewicz, Sean Collins, Rachel Graham, and Christof Stahel

September 9, 2019

In the past year, regulators have expressed concerns that regulated funds with a mandate to invest in investment grade corporate bonds might pose risks to financial stability. A case in point is the Bank for International Settlements’ (BIS) March 2019 Quarterly Review. The only way that the BIS can conclude that downgrades could fuel “fire sales” in “excess of daily turnover in corporate bond markets” is to assume that all market participants would quickly sell downgraded bonds. But the BIS headlines and charts focus solely on mutual funds....

Read more…

TOPICS: Bond FundCorporate BondsFinancial StabilityMutual Fund

30 Tips to Celebrate 30 Years of Investor Education

By Christina Kilroy

September 3, 2019

For 30 years, the ICI Education Foundation has pursued its mission to advance investor education by developing, delivering, and promoting investor education to diverse audiences across a range of ages and life stages. As we kick off our celebration of the foundation’s 30th anniversary in October, we will be sharing tips for successful investing on our social media accounts over the coming weeks....

Read more…

TOPICS: 401(k)IRAInvestment EducationMutual FundSavingsTaxes

Critics Claim Retirement Savers Aren’t Behaving Rationally. The Data Say They Are.

By Peter Brady

August 22, 2019

In a letter to MarketWatch responding to “Opinion: This Recent Report Suggests Steady Saving for Retirement Is Not Important,” published August 14, ICI Senior Economic Adviser Peter Brady refutes claims that criticize ICI’s recent retirement research, noting that more people benefit from employer plans than is commonly understood….

Read more…

TOPICS: 401(k)IRARetirement PolicyRetirement Research

IRA Investors Are Concentrated in Lower-Cost Mutual Funds

By James Duvall

August 20, 2019

Individual retirement accounts (IRAs) represent the largest share of assets in the US retirement market, with assets totaling $8.7 trillion at year-end 2018. Forty-six percent of this total is held in mutual funds, with IRA mutual fund investors primarily invested in equity funds. As part of ICI’s ongoing efforts to shed light on important insights into IRA investing, ICI is updating its analysis of expense ratios that investors pay on mutual funds in their IRAs....

Read more…

TOPICS: 401(k)Bond FundEquity InvestingIRAMutual FundRetirement ResearchShareholder

Mind the Gap

By Sarah Holden and Christina Kilroy

July 22, 2019

It’s a good idea to “mind the gap” if you’re traveling on the Tube in London, taking Amtrak in the United States, or riding Metro in Paris or Washington, DC. Being mindful of the space between where you are and where you’re going is important—not only when navigating public transit, but also when saving for retirement. Saving for retirement is a career-long process, with many decisions along the way....

Read more…

TOPICS: 401(k)IRAInvestment EducationMutual FundRetirement ResearchSavingsShareholderTaxes

Alibaba’s Joseph C. Tsai in Conversation with Paul Schott Stevens

By Lauri Bearce

June 24, 2019

The world’s two largest economies, the United States and China, need to collaborate on technological innovation to do good for society and to have global impact, Joseph Tsai, Alibaba Group cofounder and executive vice chairman, said at ICI’s 61st General Membership Meeting.

Read more…

TOPICS: GMMGlobalInternational

Global Leaders Discuss Building a Competitive European Union

By Jean-Claire Perini

June 12, 2019

EU policymakers need to have a global mindset if the European Union is to compete and thrive in today’s interconnected marketplace. That’s according to an informative panel at ICI’s 2019 General Membership Meeting in Washington, DC, featuring ICI President and CEO Paul Schott Stevens, Honorary Director General of the European Fund and Asset Management Association (EFAMA) Peter De Proft, and former Secretary General of the International Organization of Securities Commissions David Wright....

Read more…

TOPICS: GMMICI GlobalInternational

Fund Industry Leaders Encourage Cultural Stability and Willingness to Embrace Change

By Olivia Caverly

May 31, 2019

The mutual fund industry is being driven by change. At this year's General Membership Meeting, the panel “Facing the Future: Leadership Perspectives" highlighted why firms should be encouraging a positive workplace culture, which will enable them to embrace the fast pace of industry change....

Read more…

TOPICS: GMMOperations and Technology

Parag Khanna Talks Asia at ICI’s GMM

By Miriam Bridges

May 30, 2019

How can powerful nations continue to thrive? By being more connected to Asia, said Parag Khanna, the founder and managing partner of the advisory firm FutureMap. The noted global strategist and author shared this argument and more from his latest book, The Future Is Asian, with the guests at ICI’s 61st General Membership Meeting in Washington, DC, highlighting that Asia is becoming an ever-more important destination for investment....

Read more…

TOPICS: GMMICI GlobalInternational

In Marketing, Either Adapt or Fall Behind

By Rob Elson

May 30, 2019

Seasoned marketing professionals took to the main stage at ICI’s General Membership Meeting to survey the modern business landscape and unpack strategies for reaching and retaining customers in a digital, data-driven world. Drawing on their unique perspectives, BlackRock’s Frank Cooper III, Salesforce’s Simon Mulcahy, and Nuveen’s Martha “Marty” Willis each shared sharp insights on how the business-to-customer relationship is changing—and on what companies must do to keep ahead of the curve....

Read more…

TOPICS: GMM

It’s 5/29—Are You Taking Full Advantage of College Savings Opportunities?

By Sarah Holden and Christina Kilroy

May 29, 2019

Saving for an education is an important financial goal for millions of US households. In fact, nearly one-quarter of mutual fund–owning households indicate saving for educational expenses is one of their goals for their mutual fund investments. An increasingly popular way to save for college is through 529 plans, named for the section of the tax code that provides for their favorable tax treatment....

Read more…

TOPICS: Investment EducationSavingsTaxes

2019 Investment Company Fact Book: Letter from the Chief Economist

By Sean Collins

May 7, 2019

Globalization has hit a few speed bumps in recent years, but it hasn't slowed the globalization of the Investment Company Fact Book. Consistent with ICI’s mission to represent the interests of regulated funds and their investors worldwide, Fact Book is expanding its international presence....

Read more…

TOPICS: Financial MarketsFund RegulationGlobalInvestor ResearchMutual FundPolicy ResearchRetirement PolicyRetirement ResearchSavingsShareholder

SEC Chairman Jay Clayton Tackles Hot Topics at GMM

By Garrett Hawkins

May 2, 2019

In introducing SEC Chairman Jay Clayton ahead of his highly anticipated appearance at ICI’s 61st annual General Membership Meeting this morning, ICI President and CEO Paul Schott Stevens praised the chairman’s “erudition, dedication, and acumen” in leading the Commission. And during their 40-minute conversation—which tackled some of the top issues facing funds and their investors—each of those qualities was on show.

Read more…

TOPICS: Financial MarketsFund RegulationGMM

ICI’s Quarterly Retirement Market Resource

By Miriam Bridges

April 23, 2019

ICI publishes statistics on the US retirement market every quarter as an information resource for mutual funds, individual investors, the media, policymakers, and researchers. This report includes individual retirement account (IRA) and defined contribution (DC) plan assets, including 401(k) plans, and mutual fund assets held in retirement accounts....

Read more…

TOPICS: 401(k)IRAMutual FundRetirement ResearchSavings

Don’t Forget the 401(k): America’s Retirement System Helps Workers Save and Preserve Assets

By Paul Schott Stevens

February 26, 2019

In a letter to the Wall Street Journal responding to “Forget the 401(k),” published February 11, ICI President and CEO Paul Schott Stevens shows how the US retirement system actively engages employers to promote workers' retirement saving, noting that the current system also preserves choice and control of investments....

Read more…

TOPICS: 401(k)Retirement PolicyRetirement Research

IRA: Will You Be Mine?

By Sarah Holden

February 12, 2019

As this Valentine’s Day approaches, step back and consider treating yourself or your spouse to an individual retirement account (IRA) contribution. Saving for retirement is an important household financial goal and contributing to an IRA is a good step toward providing for those later years....

Read more…

TOPICS: IRARetirement Research

From December Outflows to January Inflows: Seasonal Factors in Mutual Fund Flows

By Shelly Antoniewicz and Morris Mitler

February 4, 2019

As US and global stock markets churned in December, the press took note of ICI’s reports on outflows from US long-term mutual funds and drew a hasty conclusion: individual fund investors were fleeing from market turmoil. But weighing flows against total assets is the first step to putting fund flows in context. A second factor to be considered is the calendar. It turns out that mutual fund flows have a distinct seasonal pattern, with stronger inflows early in the year giving way to weaker inflows or outflows during the second half.

Read more…

TOPICS: Bond FundEquity FundMutual Fund

A Year of Advocacy: IDC’s 2018 Annual Review

Amy B. R. Lancellotta

January 31, 2019

IDC is well known for its education and outreach programs—and it’s not hard to see why. Year after year, they provide fund directors with opportunities to hone their craft and connect with one another, equipping them with the tools they need to thrive in their oversight role for the benefit of fund shareholders....

Read more…

TOPICS: Fund GovernanceFund RegulationIDC

Corporate and Investment Grade Bond Funds: What’s in a Name?

By Sean Collins

January 4, 2019

Financial stability concerns are being inflated by confusion over what the funds in question actually hold. In fact, these funds invest nearly half their assets in Treasury and agency securities, and less than one-third in corporate bonds. In other words, these funds hold more in government bonds—traditionally the “safe haven” that investors seek in times of turmoil—than in the corporate bonds that seem to cause the regulators’ angst....

Read more…

TOPICS: Bond FundCorporate BondsFinancial StabilityMutual Fund

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