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Be Wise With Money

7 Common Investment Terms & What They Can Mean for You

person looking through investment options

Congratulations! You've put money aside. So what do you do with it?

You know savings accounts and certificates of deposit pay relatively little interest. But you also know you want the money to help you reach your financial goals.

Welcome to the world of investing. Yes, it can seem bewildering. But it doesn't have to be. To help you get started, here's a look at seven common types of investments.

Types of investments

1. Stocks.

These are ownership shares in a company. Businesses issue stock to the public and invite investors to purchase shares as a way to generate capital.
If the company does well, the stock typically appreciates in value; if the company does not do well, the stock typically depreciates in value. Over time, if you've chosen well, stocks can provide strong returns. But keep in mind, the opposite can also be true.

2. Mutual funds.

But here's something to consider about stocks: They represent an interest in a single company, so the risk is concentrated in the fortunes of that company. And they can require time and expertise to evaluate and monitor. Given that, mutual funds can be a better approach for those who do not have the time and expertise to manage individual stocks.
A mutual fund is a collection of stocks and/or bonds selected by a professional fund manager based on a set investment objective. The core idea is to spread out or diversify your holdings across many different investments to help manage risk and potentially earn more balanced returns. Keep in mind, mutual funds do have risks, so it's also possible to lose money in a mutual fund.
One bonus: Individual investors won't have to research companies and their stock performance – the investment firm takes care of that.

3. Bonds. 

Think of a bond as a loan that an investor makes to a company or government entity to help finance projects and activities. Unlike a stock, most bonds have a set term or maturity date and a fixed rate of interest. U.S. savings bonds are a familiar example.

Bonds tend to provide more stability in an investor's portfolio, which can be valuable in times of market volatility. They can carry less risk than equities, but this comes at the cost of a lower return.

4. Exchange-traded funds (ETFs).

Like mutual funds, ETFs can hold stocks and bonds, and they're managed by investment firms. But there are key differences in how they are traded.
ETFs trade like stocks – they must be bought and sold through a brokerage account, and the market price changes throughout each day. Mutual fund shares are priced once a day after the markets close.
Most ETFs also are managed to track the performance of a market benchmark such as the Standard & Poor's (S&P) 500. If the value of the S&P rises, the ETF's value will likely climb as well – and vice-versa.

5. Closed-end funds.

Closed-end funds are similar to mutual funds and ETFs in that they provide a professionally managed portfolio of securities such as stocks or bonds. Like stocks and ETFs, shares of closed-end funds are traded throughout the day.
What makes them "closed?" The fund doesn't create new shares after the first offering. Instead, investors buy and sell shares on the secondary market (commonly known as the stock market), so investor activity has no impact on the underlying assets in the fund's portfolio.
One result: The fund managers don't have to continually reinvest new cash or sell existing investments to fund redemption requests (which are the return of investors' principal in, for example, stocks, bonds or mutual fund shares when they mature).
And that can allow fund managers to invest in less-liquid securities and implement more specialized strategies.

6. Preferred stocks.

Most stock shares are called common stock. These shares represent a sliver of ownership in a company and a claim on a portion of profits, generally through dividends. But companies can also issue preferred stock, which combines features of bonds (in that it pays a fixed dividend) and stocks (because it has the potential to appreciate in price).
One advantage for investors: Preferred stock shares pay a regular dividend that must be paid before dividends are paid to common stock holders.

7. Convertible securities.

These are either bonds or shares of preferred stock that pay a fixed interest or dividend payment and can be converted into common stock at a specified price. Under some circumstances, the flexibility of converting to common stock can add value to your investment.

You don't have to go it alone

While each of these investment categories has different levels of risk and tax implications, this much is clear: Investing wisely can help you towards reaching your long-term financial goals. You simply need to get started sooner rather than later.

A Thrivent Financial representative can help you develop a diversified1, well-balanced portfolio. That way, if one investment doesn't perform well, the others can help pick up the slack. Your advisor also can help you tailor a portfolio that fits your goals and life situation.

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