7 Most Common Investment Products
Learning Outcomes:
- Learn how various factors or events can affect stock prices.
- Understand the risks of buying stocks.
- Explain what bonds are and how they are rated.
- Identify what a bond market is.
- Describe what exchange-traded funds (ETFs) are and how to research them.
- Learn how to buy and sell ETFs.
- Describe what mutual funds are and how to research them.
- Learn how to buy and sell mutual funds.
Stocks
Stocks are a type of security that gives stockholders a share of ownership in a company. Stocks also are called “equities.”
Why do people buy stocks?
Investors buy stocks for various reasons. Here are some of them:
- Capital appreciation, which occurs when a stock rises in price.
- Dividend payments, which come when the company distributes some of its earnings to stockholders.
- Ability to vote shares and influence the company.
Why do companies issue stock?
Companies issue stock to get money for various activities which may include:
- Paying off debt;
- Launching new products;
- Expanding into new markets or regions; and
- Enlarging facilities or building new ones.
What kinds of stocks are there?
There are two main kinds of stocks, common stock and preferred stock:
- Common stock entitles owners to vote at shareholder meetings and receive dividends.
- Preferred stockholders usually don’t have voting rights, but they receive dividend payments before common stockholders do and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.
Common and preferred stocks may fall into one or more of the following categories:
- Growth stocks have earnings growing at a faster rate than the market average. They rarely pay dividends and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
- Income stocks pay dividends consistently. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
- Value stocks have a low price-to-earnings (PE) ratio, meaning that they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
- Blue-chip stocks are shares in large, well-known companies with a solid history of growth. They generally pay dividends.
(U. S. Securities and Exchange Commission (USSEC], n.d.-e)
Introduction to Stocks
Watch the video:
The Standard & Poor’s 500 Stock Index (S&P 500) is an “inclusive index made up of 500 stock prices including 400 industrials, 40 utilities, 20 transportation, and 40 financial issues. The index is constructed using market weights (stock price multiplied by shares outstanding) to provide a broad indicator of stock price movements” (2003, p. 357).
In this activity, students will:
- Work in groups to review scenarios that may affect an imaginary company’s stock price;
- Brainstorm on why they think the stock price rose or fell; and
- Reflect on the risks and rewards of stock investing.
Download Activity:
- Playing an Investment Game (Teacher Guide)
- Playing an Investment Game (Worksheet)
The key takeaways in this activity are:
- When new shares of a stock are issued and sold, savings turn into investments.
- The stock market can be a riskier method of investment than investing through banks.
Bonds
A bond is a debt security, like an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.
When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it “matures,” or comes due after a set period of time.
Why are bonds bought and sold?
Investors buy bonds because:
- They provide a predictable income stream. Typically, bonds pay interest on a regular schedule, such as every six months.
- If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing.
- Bonds can help offset exposure to more volatile stock holdings.
Companies, governments, and municipalities issue bonds to get money for various things, which may include:
- Providing operating cash flow.
- Financing debt.
- Funding capital investments in schools, highways, hospitals, and other projects.
What types of bonds are there?
There are three main types of bonds:
- Corporate bonds are debt securities issued by private and public corporations. Some common types of corporate bonds include investment-grade (with a higher credit rating, implying less credit risk, than high-yield corporate bonds) and high-yield (with a lower credit rating, implying higher credit risk).
- Municipal bonds, called “munis,” are debt securities issued by states, cities, counties, and other government entities. Types of “munis” include:
- General obligation bonds that are payable from either an issuer’s general fund or specific taxes (usually property tax).
- Revenue bonds that are backed by revenues from a specific project or source, such as highway tolls or lease fees.
- Conduit bonds issued on behalf of private entities such as non-profit colleges or hospitals.
- U.S. Treasuries are issued by the U.S. Department of the Treasury on behalf of the U.S. government. They carry the full faith and credit of the U.S. government, making them a safe and popular investment. Types of U.S. Treasury debt include:
- Treasury Bills (short-term securities maturing in a few days to 52 weeks)
- Notes (longer-term securities maturing within ten years)
- Bonds (long-term securities that typically mature in 30 years and pay interest every six months)
- TIPS (Treasury Inflation-Protected Securities) are notes and bonds whose principal is adjusted based on changes in the Consumer Price Index. TIPS pay interest every six months and are issued with maturities of five, ten, and 30 years.
(USSEC, n.d.-a)
Introduction to Bonds
Watch the video:
The following video and practice questions will explain what the bond market is and how bonds are rated:
- Watch the video*:
* Note that the credit rating information in the video is not current. Starbucks is no longer A-.
- Answer these practice questions.
The key takeaways in the video and practice questions are:
- By issuing bonds, a company can raise capital and make big investments.
- Companies repay debt to borrowers over a long timeline as investments provide a return payback.
- The demand for borrowing increases when the government decides to borrow large amounts of money.
- Bonds are rated by agencies such as the S&P 500.
Stocks vs. Bonds
Benefits and risks of stocks
- Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. Investors willing to stick with stocks over long periods of time, say 15 years, generally have been rewarded with strong, positive returns.
- But stock prices move down as well as up. There’s no guarantee that the company whose stock you hold will grow and do well; so you can lose money that you invest in stocks.
- If a company goes bankrupt and its assets are liquidated, common stockholders are the last in line to share in the proceeds. The company’s bondholders will be paid first, then holders of preferred stock. If you are a common stockholder, you get whatever is left, which may be nothing.
- Even when companies are not in danger of failing, their stock price may fluctuate up or down. Large company stocks as a group, for example, have lost money on average about one out of every three years. If you have to sell shares on a day when the stock price is below the price you paid for the shares, you will lose money on the sale.
- Market fluctuations can be unnerving to some investors. A stock’s price can be affected by factors inside the company, such as a faulty product, or by events over which the company has no control, such as political or market events.
- Stocks are usually one part of an investor’s holdings. If you are young and saving for a long-term goal such as retirement, you may want to hold more stocks than bonds. Investors nearing or in retirement may want to hold more bonds than stocks.
- The risks of stock holdings can be offset in part by investing in a number of different stocks. Investing in other kinds of assets that are not stocks, such as bonds, is another way to offset some of the risks of owning stocks.
(USSEC, n.d.-e)
Benefits and risks of bonds
- Bonds can provide a means of preserving capital and earning a predictable return. Bond investments provide steady streams of income from interest payments prior to maturity.
- The interest from municipal bonds is generally exempt from federal income tax and may also be exempt from state and local taxes for residents in the states where the bond is issued.
- As with any investment, bonds have risks. These risks include:
- Credit risk. The issuer may fail to make timely interest or principal payments and thus default on its bonds.
- Interest rate risk. Interest rate changes can affect a bond’s value. If bonds are held to maturity the investor will receive the face value, plus interest. If sold before maturity, the bond may be worth more or less than the face value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount. Read more from the U.S. Securities and Exchange Commission (2013).
- Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.
- Liquidity risk. This refers to the risk that investors will not find a market for the bond, potentially preventing them from buying or selling when they want to.
- Call risk. The possibility that a bond issuer retires a bond before its maturity date, something an issuer might do if interest rates decline, much like a homeowner might refinance a mortgage to benefit from lower interest rates.
(USSEC, n.d.-a)
Exchange-Traded Funds (ETFs)
An ETF is a type of exchange-traded investment product available for retail investors. In some ways, ETFs are similar to mutual funds. For example, both are registered investment companies that can provide similar benefits such as professional management, investment diversification, and a low minimum required investment. But ETFs are structured differently than mutual funds, which creates different benefits and risks.
(USSEC, n.d.-b)
Watch the video:
Check out the following resources:
- 5 Best ETFs (Davis, 2025)
- A Guide for Investors (USSEC, n.d.-d)
Mutual Funds
A mutual fund is an open-end investment company or fund. An open-end fund is one of three basic types of investment companies. The other two types of investment companies are closed-end funds and unit investment trusts (UITs). Exchange-traded funds (ETFs) are generally also structured as open-end funds, but can be structured as UITs as well.
A mutual fund continuously pools money from many investors and invests the money in stocks, bonds, money market instruments, other securities, or even cash.
(USSEC, n.d.-c)
Watch these videos:
Answer these practice questions:
- What are the key differences between mutual funds and ETFs?
- Which kind of investment would you choose, based on your knowledge of both?
Key Takeaways:
- Putting money into investments like stocks, bonds, mutual funds, and commodities can mean greater returns over the long term, but also means higher risks.
- Stocks are shares of ownership and are traded in organized markets called stock exchanges.
- The stock market can be a riskier method of investment than investing through banks.
- By issuing bonds, a company can raise capital and make big investments.
- Bonds are rated by agencies such as the S&P 500.
- ETFs rely on diversified stocks bracketed into common themes.
- The price of ETFs fluctuates throughout the day along with the stock market, where ETF trading occurs.
- A mutual fund is a financial-service company that pools its investors’ funds to buy a selection of securities—marketable securities, stocks, bonds, or a combination of securities—that meet its stated investment goals.
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References
Davis, C. (2025, February 2). 20 best ETFs for February 2025 and how to invest. NerdWallet. https://www.nerdwallet.com/article/investing/how-to-invest-in-etf-exchange-traded-fund
Standard & Poor’s 500 Stock Index. (2003). In D. L. Scott, Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor. Houghton Mifflin. https://financialdictionary.thefreedictionary.com/Standard+%26+Poor%27s+500+Stock+Index
U. S. Securities and Exchange Commission. (n.d.-a). Bonds. Investor.gov. Retrieved February 6, 2025, from https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
U. S. Securities and Exchange Commission (n.d.-b). Exchange-traded funds (ETFs). Investor.gov. Retrieved February 9, 2025, from https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-24
U. S. Securities and Exchange Commission. (n.d.-c). Mutual funds. Investor.gov. Retrieved February 9, 2025, from https://www.investor.gov/introduction-investing/investing-basics/glossary/mutual-funds
U. S. Securities and Exchange Commission (n.d.-d). Mutual funds and exchange-traded funds (ETFs): A guide for investors. Retrieved February 9, 2025, from https://www.sec.gov/about/reports-publications/investor-publications/introduction-mutual-funds
U. S. Securities and Exchange Commission. (n.d.-e). Stocks. Investor.gov. Retrieved February 9, 2025, from https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks
U. S. Securities and Exchange Commission (2013, June 26). Investor bulletin: Fixed income investments: When interest rates go up, prices of fixed-rate bonds fall. Investor.gov. https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-86
