Types of Investments

Stocks

Common Stock is a security that represents ownership in a corporation or company. A share certificate is issued to the shareholder, which represents how much cash value he/she has in that corporation. The value of these shares changes in the marketplace constantly. Stocks can be purchased through a broker who goes to a stock exchange to buy/sell these shares for the customer. The three most well known stock exchanges are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the NASDAQ exchange. The share size and capitalization of the company, among other factors determine where the company's stock is traded.

Preferred Stock is shares representing an ownership interest in a company that has "preference" over common stock shares. Most buyers of preferred stock are large corporations, or investors seeking a steady flow of dividend income rather than share price appreciation. When a preferred stock is purchased, the company has already set the dividend. Paid on a quarterly basis, the dividend payment does not fluctuate in price, and does not depend on how well the company is performing. If the company goes broke, claims from preferred shareholders are satisfied before those of common shareholders.

HOLDERS

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Bonds

A Bond is a debt instrument that is issued by a corporation, the U.S. Government, foreign governments, a city government, a state government, a School District, etc. It is basically an IOU. An issuer of a bond, such as the U.S. Government, is the borrower of money. You, the investor, are the lender, as the purchaser of the bond. These debt instruments pay you interest in exchange for your loan.

The cardinal rule in bond investing: As interest rates go down, bond prices tend to go up. When interest rates go up, bond prices tend to go down.

Annuities

An annuity is a contract between you and an insurance company. You give the insurance company money one time, or over a period of years, and the company, in turn, promises to make regular payments to you over your lifetime, or for a certain period you specify.

An Immediate annuity will start making secure, guaranteed payments to you right away (usually within the first year of paying your premium). If you are still saving money for retirement, however, a deferred annuity is probably a better option for you. Deferred annuities enable you to grow your money through tax-deferred interest accumulation over a period of time before they begin paying you. After the accumulation period (usually 1, 5, or 10 years), the insurance company will begin making payments to you based on the income option you selected.

And tax-deferred annuities offer important benefits not found in other tax-qualified accounts (such as IRAs and 401(k) plans): first, there is no limit to the amount of money you may contribute to an annuity; and second, annuities guarantee that upon the death of the investor, his or her beneficiary will receive either the annuity's market value or at least the amount of the original investment.

The following may be Immediate or Tax-deferred Annuities

Fixed rate annuities offer a high degree of safety because they pay a fixed rate of return. The company may declare a new interest rate annually, but the rate will never fall below the minimum guaranteed rate stated in the policy. For more on fixed rate Annuities click here

CD Type Annuities are a special class of fixed annuities. These annuities have been placed in a class by themselves because they have one unique characteristic: The interest rate is guaranteed for every year in which a surrender charge exists. In other words, like a bank CD, the insurance company guarantees a fixed interest rate for a certain period of time, such as 5 or 10 years. (By contrast, in a traditional fixed annuity the insurance company fixes the interest rate every year on the anniversary of your initial deposit.) All annuities impose surrender charges, usually decreasing over time, to discourage short-term investment. Surrender charges will reduce the value of - and the return on - your investment, and only apply if you withdraw your money before the end of the contract period. But if you have a long-term investment horizon, CD Type Annuities offer guaranteed interest rates that will grow your money tax-deferred for years to come.

Annuities that are performance-linked to the S&P 500 stock index, such as equity indexed annuities, are appealing to many people who want to earn competitive rates of return on their investment. The S&P 500 is generally considered representative of the U.S. stock market. Equity indexed annuities, however, are not securities, but classified as single-premium traditional annuities. This makes equity indexed annuities attractive for several reasons.

The first and possibly most-attractive provision of equity index annuities is the no-loss provision, or minimum rate guarantee. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount.

The next benefit of equity index annuities that appeals to many people is interest guarantees. Most policies have a cap (the maximum interest rate that can be credited to a policy in a policy year) and a floor (the minimum interest rate that can be credited in a policy year). The cap rate can vary from no cap to a fixed percentage, but the floor is generally zero. This allows the policyholder to benefit from potentially high returns and be guaranteed at the same time that no money will be lost.

Equity index annuities may not be suitable for all investors. EIA's typically require a time commitment, have an upper limit on annual return and may have penalties for early withdrawal. Withdrawals of tax-deferred accumulation are subject to ordinary income tax, including a 10% federal tax penalty prior to age 59 1/2.

Finally, equity index annuities offer the same benefits as traditional annuities, such as tax-deferred growth and early withdrawal of funds without penalty. This early withdrawal is usually conditioned upon the annuitant's death or admittance to a nursing home. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

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Although there are many types of annuities, and each has its own advantages, fixed annuities allow you to invest at a guaranteed basic interest rate while the earnings grow tax-deferred. As an added bonus, the insurance company guarantees the full amount of your premium - minus any withdrawals - and the interest. Tax qualified retirement plans (e.g. IRAs, 401(k) or other qualified retirement plans defer payment of taxes on earnings until withdrawn. If you are considereing funding a tax-qualified retirement plan with an annuity, you should know that an annuity does not provide an additional tax deferral beyond that provided by the tax-qualified plan itself. However, annuities do provide other features and benefits. Including but not limited to a guaranteed death benefit and income options, for which a mortality and expense risk fee is charged. You should also discuss the decision to use an annuity in a tax-qualified plan with your investment representative.

Mutual Funds

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Savings Bonds

Savings bonds are easy to buy, safe and secure, a market-based investment, a liquid long-term investment, can be used for education savings, have tax advantages and are Good for America! U.S. Series EE Savings Bonds general rules have recently changed somewhat for new bonds issued. The new variable rate rules for EE bonds purchased pay 85% of the average yield on 6-month T-bills for the first five years you hold it. After five years, the return jumps to 85% of the 5-year Treasury rate adjusted semi-annually. You can't get out of this bond for at least six months and when you do, the return is not credited in-between interest dates. So, if you redeem two days before that semi-annual date, you have missed out on six months of interest. These bonds, by the way, are held for an average of ten years, even though they pay short-term rates for long-term investment.

To be fair, Series EE bonds do offer some unique advantages. First, unlike other zero coupon government debt, no taxes are due on the accrued interest until the bonds are redeemed. Second, under certain circumstances the interest on the bonds may be completely tax-free if the bonds are redeemed in a year in which you pay college tuition for yourself or a child. Third, they are direct obligations of the U.S. government so they offer rock solid security of principal. They are available in convenient denominations ranging from $50 to $10,000.

Series EE bonds may only be purchased in one of three ways: directly from the government, through a participating bank or savings institution or through a payroll savings plan established by an employer. Savings bonds can only be registered in one of three ways: in single name, jointly with right of survivorship or in single name with a designated beneficiary to be paid upon the death of the owner. Once purchased, savings bonds cannot be sold or transferred to someone else. They also may not be used as collateral for a loan. Purchasers are limited to $30,000 in face value (or $15,000 in purchase price) worth of Series EE bonds per year.

As mentioned, Series EE bonds are essentially zero coupon bonds. They are purchased at half their face value. If held for five years the older outstanding bonds accrue interest at 85% of the average rate on 5-year Treasury notes, adjusted semi-annually every May and November or at a guaranteed minimum rate depending on their issue. No more guaranteed minimum for the new bonds. At 4%, Series EE bonds are guaranteed to reach face value in about 18 years. Of course, if 5-year Treasury rates are higher than 4% over the life of the bond, Series EE bonds could reach their full face value in less than 18 years. The bonds can be held, and interest will continue to accrue, for up to 30 years after issue.

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