Investments with more risk and bigger returns
Purchasing individual stocks and bonds directly is possible for any investor. Some investors have significant financial resources, and can afford to purchase a wide variety of stocks and bonds. For those who do not have the resources to buy diverse holdings, it is risky for individuals to purchase single stocks and bonds. This is like "putting all your eggs in one basket." Individuals with moderate incomes can reduce risks by joining forces with others to make joint investments, typically through investment vehicles called "mutual funds." Mutual funds hold many types of stocks, bonds, and other investments, are designed to reflect many different kinds of investment strategies, and are run by professional money managers. (See the Mutual Funds section, below.)
Stocks (also called Equities). You purchase a part ownership in a company when you buy a "share" of stock. Stock prices may rise or fall quite a lot from year to year, but have historically delivered better long-term results than bonds or savings accounts. Some stocks, usually those of large, established companies, pay out profits in the form of dividends, usually four times a year. Those that pay very small or no dividends are called growth stocks, generally issued by small companies that are much riskier but that have higher potential returns. You make money by selling your shares when their value increases. All profits are taxable, while losses can be written off within limits. Full service stockbrokers that provide investment advice typically charge higher commissions than "do-it yourself" discount brokerages that charge a small commission for each stock trade you make.
Corporate bonds. Buying a corporate bond from a broker means you are, in effect, loaning money to a corporation, which in turn pays you interest income twice a year at an agreed-upon rate for the term of the bond. It's usually safer to buy highly-rated bonds (i.e. AAA) issued by prominent corporations with lower risk of default. Bonds are classified as “investment grade” (AAA to BBB) and “non-investment grade” (BB or lower), which includes “junk” bonds, offering higher returns in exchange for more risk. You can sell a corporate bond, but price typically varies widely depending on market conditions. The minimum investment is generally $1,000.