Options Stocks A stock is an investment in a specific company. Companies sell shares of stock in their businesses to raise cash; investors can then buy and sell those shares among themselves.
Stocks sometimes earn high returns but also come with more risk than other investments. Companies can lose value or go out of business.
Read our full explainer on stocks. Bonds options varieties and types generally considered less risky than stocks, but they also may offer lower returns. The primary risk, as with any loan, is that the issuer could default.
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State and city government bonds are generally considered the next-less-risky option, followed by corporate bonds. Generally, the less risky the bond, the lower the interest rate.
For more details, read our introduction to bonds. How investors make money: Bonds are a fixed-income investment, because investors expect regular income payments.
Mutual funds allow investors to purchase a large number of investments in a single transaction. These funds pool money from many investors, then employ a professional manager to invest that money in stocks, bonds or other assets. Some funds invest in both stocks and bonds.
How risky the mutual fund is will depend on the investments within the fund.
Read more about how mutual funds work. When investments in the fund go up in value, the value of the fund increases as well, which means you could sell it for a profit. The risk associated with an index fund will depend on the investments within the fund.
Learn more about index funds. How investors make money: Index funds may earn dividends or interest, which is distributed to investors.
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- The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.
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- For this right, a premium is paid to the seller.
These funds may also go up in value when the benchmark indexes they track go up in value; investors can then sell their share in the fund for a profit. Index funds also charge expense ratios, but as noted above, these costs tend to be lower than mutual fund fees.
Like index funds, they tend to be cheaper than mutual funds because they are not actively managed. ETFs may also pay out dividends and interest to investors. As the name implies, doing so is an option. Most options contracts are for shares of a stock. You can then either options varieties and types or sell the stock at the agreed-upon price within the agreed-upon time; sell the options contract to another investor; or let the contract expire.
How investors make money: Options can be quite complex, but at a basic level, you are locking in the price of a stock you expect to increase in value. If your crystal ball is right, you benefit by purchasing the stock for less than the going rate.
Unlike a bank account, a brokerage account allows you to buy and sell investments. Read our full guide for more on how and where to open a brokerage account.