A mutual fund is a professionally-managed investment pool containing securities purchased with money from numerous investors. Unlike hedge funds, mutual funds are marketed to retail investors, so they are regulated by government authorities. The majority of mutual funds are said to be open-ended, meaning the investors are entitled to sell or buy the fund's shares whenever they wish. U.S.-based mutual funds require registration by the SEC, and they must have a registered investment adviser as manager. Also, if the fund is established as a partnership or corporation, it must be directed by a board of directors, or by trustees if the fund is a trust. Mutual funds may avoid taxation under certain conditions.
A similar type of investment is the exchange-traded fund (ETF), which trades on major stock exchanges alongside equities. This type of fund may contain assets such as equities, bonds, and commodities; for trading it is valued at its net asset value (NAV) during the session. Typically, these funds are designed to track bond indexes or stock indexes. ETFs offer advantages to certain investors because they are similar to stocks and may be more tax efficient than some other types of funds. In contrast to standard mutual funds, the underlying company shares held within exchange-traded funds are purchased by institutions directly from the ETFs in the form of large blocks.
Equities are ownership interests in the form of shares in the stocks of corporations. The value of a company's stock generally tracks the perceived value of the company's residual assets that would be owed to stockholders upon liquidation of the company, after paying senior claims and debts. Shares of stock are authorized by shareholders and issued by the company, typically in classes such as common stock and preferred stock, and often in series such as “A” and “B.” Among investors, convertible bonds are a popular investment which can be converted between an equity and a debt security according to the investor's strategy. Stocks form the largest portion of many retail investors' portfolios.
Municipal bonds are debt securities issued by agencies of local governments. Typical issuers of “munis” include cities, counties, state agencies, redevelopment districts, school districts, utility agencies, maritime ports and airports. Municipal bonds may be issued as general obligations, or they may be secured by specific or dedicated revenues. The proceeds from bond sales are often used to fund capital expenditures for public works such as roads, schools and other infrastructure. Municipal bonds are attractive to certain investors because the interest income which the holder receives is generally exempted from federal tax, as well as from many local and state taxes. Munis are brought to the marketplace without any pricing restrictions, and they can be traded freely by investors.
Corporate bonds are debt securities backed by revenues from a company's expected future operations, and sometimes also based on collateral of company assets. These bonds are typically issued in order to raise money for expansions and capital improvements. The interest payment (coupon) is typically subject to taxation. In order to offer these bonds to the public and achieve a favorable interest rate, corporations must generally be credit-worthy and have a track record of consistent earnings; the better the company's credit profile, the more debt it may issue, and at a more favorable rate. These securities are generally listed on ECNs and exchanges, with the largest volume of trading completed through dealer-based networks.
Treasury securities are U.S.-government issued debt securities with long maturities. Their interest rates are fixed, and they typically pay interest semiannually. Their income is generally only subject to federal taxation. These bonds are issued in denominations of at least $1000, and they are first sold to dealers through auctions using both competitive-bid and non-competitive bid processes. The four types of marketable Treasury securities are: Treasury bonds, Treasury notes, Treasury bills, as well as Treasury Inflation Protection Securities (TIPS); each is highly liquid and well-traded in secondary markets. Non-marketable Treasury securities include Savings Bonds available for individual savers with various maturity periods, in values ranging from $50 to $10,000.
A Certificate of Deposit is a form of low-risk investment in the form of a time deposit note issued by a bank, credit union, or thrift institution. Bank-issued CDs are insured by the Federal Deposit Insurance Corporation (FDIC); if the issuer is a credit union, the CD is insured under the National Credit Union Administration (NCUA). CDs differ from ordinary savings accounts because Certificates of Deposit offer fixed terms ranging from as little as a single month to as much as five years, and they typically offer pre-set interest rates. A CD allows its holder to withdraw funds only at maturity of the deposit period, or the holder may be penalized for early withdrawal. Upon maturity, the investment may be withdrawn from the CD along with the interest accrued during the holding period.
An annuity is a financial product marketed by insurance companies and other financial institutions. The annuity is an insurance contract by which a person pays a lump-sum premium to the institution, and the money is returned to the person through a series of payments over time. Ordinary annuity contracts are authorized under the Internal Revenue Code, and are regulated by state regulators. Historically, annuities have been used to provide guaranteed income for retirement by distributing payments until a specified final date, or until the death of the person insured in the contract. Variable annuities are hybrid life-insurance-investment products; they are regulated under FINRA because their income varies according to the performance of investments held within the annuity. Nowadays, many investors buy annuities simply to accumulate money without capital gains and income taxes before taking lump-sum withdrawals, instead of relying on annuities for guaranteed lifelong income. Likewise, a Whole Life insurance policy is another type of insurance contract that offers features of an investment-- The premiums cover the cost of the insurance as well as building a savings account in which interest and dividends are tax-deferred. When the insured person dies, the insurance will pay a set amount; before that event, the investment builds cash value, which is available to the policyholder for loans or withdrawals.
A reverse mortgage is a form of debt financing through which a homeowner borrows money secured by the value of the home. Homeowners can receive cash either as a lump sum or monthly payments, or they can access the money through a revolving line of credit. The mortgage is repaid upon sale of the home, or the death of the borrower. The rate and terms of the mortgage are set so that the loan amount will be proportional to the home's expected value during the life of the loan. These mortgages provide retirement income, typically do not require a credit check, and may sometimes offer heirs the option of repaying the mortgage without selling the home.