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INTELLIGENT INVESTING:

The three most common types of long-term investment vehicles, in order of increasing risk, are bonds, mutual funds, and stocks.

Bonds are debt instruments in which an organization promises to repay a sum of money at a certain interest rate over a specified period of time. They are therefore known as "fixed-income" securities because the amount of income the bond generates each year is set or "fixed" when the bond is sold. Bonds are typically issued by organizations who need a large sum of money to complete jobs such as constructing a new school, repairing streets, building a new office, or purchasing manufacturing equipment. Bonds are similar to CD's (Certificates of Deposit), except they are typically issued by corporations or the government rather than banks.

Mutual Funds are basically diversified pools of money which are used by a professional money manager to invest in various kinds of holdings, such as stocks or bonds, based on the fund's objective. The amount of money invested in a mutual fund is commonly in millions or even billions of dollars, so this impressive buying power permits investment in many different opportunities. This inherent diversification usually makes a mutual fund less risky than owning just a few individual stocks or bonds.

Stocks represent a way for individuals to have partial ownership of a corporation in the form of "shares" since the ownership is distributed among many different people. Investors buy stocks in the hope that company earning increase, which causes a concomitant increase in the value of the stock. The price of a stock is determined by relatively complex processes, but suffice it to say that it depends primarily on "supply and demand." The value of stocks are in a constant state of fluctuation due to investor sentiment, world and market events, company news, and various other factors.

Choosing Investments is a Personal Decision

As was eluded to earlier, your choice of investments is of a personal nature and is based on your age, personality, and risk tolerance. Remember that its your money and you are going to have to live with the consequences of your investment decisions, whether they are positive or negative. Therefore, you either need to make your own decisions or work with an investment professional who is cognizant of your goals and receptive to your input.

With that said, most financial resources agree that anyone with less than $20,000 to invest should consider a portfolio of mutual funds because of their intrinsic diversity. Recommendations for stock funds are common for young investors since you have sufficient time to weather dips in the market while reaping the rewards of long-term gains. Later in life, individuals who will eventually need to depend on their investments for income may transition into bonds.

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