Introduction

When you think about investing, what types of investments come to mind? Despite the broad range of investment options available, most individual or retail investors usually think of stocks and bonds. You might also keep some savings in a bank or similar instrument, also known as “cash and equivalents,” which, along with stocks and bonds, make up the three main asset investment classes called traditional investments.

Let’s briefly look at each type of traditional investment. A stock is a type of investment that represents an ownership share in a company. Investors buy stocks that they think are likely to increase in value over time and perhaps provide income by paying dividends. A bond represents a loan funded by an investor to a borrower, such as a corporation or government. Investors buy bonds because most bonds offer a predictable income stream. Also, by holding the bonds until maturity, they get back the entire principal. Thus, bonds provide a way to preserve capital while investing. Cash ­equivalents are short-term securities, which have high credit quality and are highly liquid. Examples of cash equivalents include certificates of deposit, money market funds, and Treasury bills. Still, these cash equivalents may not even keep up with inflation. The Savvy Investor’s Guide to Building Wealth Through Traditional Investments discusses investing in stocks, bonds, and cash equivalents.