An investment vehicle is a broad category that describes almost an opportunity to earn profit on an investment.
Financial advice has its own special language, loaded with terms and phrases that aren’t easy to decipher. “Investment vehicles” is one of those industry phrases, and it’s easy to translate into everyday English.
An investment vehicle is almost anything you can buy or invest in to earn a profit.
Depending on the type of investment vehicle, it can be low-risk or high risk. Some common low-risk vehicles include certificate of deposit (CDs), bonds and high yield savings accounts.
High-risk vehicles include stocks, options or hedge funds as well as some “pooled investment vehicles,” like exchange-traded funds (ETFs).
Savvy investors typically hold several types of investments so the low- and high-risk investments balance each other. This practice is called “diversification,” and it helps minimize volatility for higher long-term returns.
When you buy a stock, you are purchasing a portion of a company, and you reap the benefits of its stock price going up. Some companies pay stockholders a portion of its earnings. Those payments are called dividends.
Bonds are considered one of the safest investments available, though they often offer lower returns. They’re an important part of a diversified portfolio, balancing against higher-risk types of investments.
In a mutual fund, your money is pooled with other investors in a selection of investments that typically includes stocks, bonds and money market accounts. Mutual funds are often tied to a particular market index. They’re also professionally managed by investment advisors to ensure diversification and optimized returns.
ETFs are pooled investments tied to an index or a commodity, like a mutual fund, but often with a wider range. They can track almost anything, from a specific commodity to other investment strategies. Unlike mutual funds, they can be bought and sold on stock exchanges.
Cash equivalents is another industry category term. It refers to savings accounts, money market funds, short-term government bonds and similar investment types. They’re typically considered as good as cash, with low returns.
How to diversify your portfolio in different investment vehicles.
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With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.