Fixed income investments are investments that yield a fixed amount of income in a certain period of time. At that certain period of time, the amount that will be raised is often predictable which is considered to be an advantage for budgeting purposes. Different types of investments under this category involve lower risks and it is one of the factors that can greatly affect in choosing the right investment. Fixed income investments are becoming more known at present especially for people that getting closer to their retirements. In this way, they would still have a stable source of income even if they are no longer working. There are several types of fixed investments; bonds, certificate of deposit and preferred stocks are the primary types.
A bonds investment uses the concept that someone borrows money from an investor and will be paid with the principal amount plus interest in return. It is also called as income fund because its purpose is to produce higher income among other investments. Together with higher income is additional risk since bond prices change. Learning the bond basics is necessary to completely understand how this investment works. A bond investment is broadly diversified thus; investors do not have to worry about the company going bankrupt. In the event that the company goes bankrupt, bondholders are more likely to be paid first before the shareholders. However, it is a must to remember that bond market is as unstable as stock the market.
A certificate of deposit investment or CD can be considered as a short term or long term investment. In this type of investment, a certain amount will be invested in a bank and the bank will give the principal amount plus interest after a certain period of time. The interest rate will depend upon the negotiation or agreement. A specific investment term will be set than can range from a month to several years. Depending on the bank’s terms, there will be an appropriate sanction if the money from a CD will be withdrawn before the end of the investment term. This investment is known to be a safe investment. In the event that the chosen bank fails to pay the investor, through 2013 the Federal Deposit Insurance Corp. (FDIC) insures bank CDs up to $250,000. Getting involved with this investment doesn’t necessarily require an investor to go through a broker which is a good thing. A broker can find a CD that offers the highest interest rate but can also charge the investor for commission. An investor can do the research himself to find the bank that offers a high interest rate. In signing a contract with the bank, reading the fine print is very helpful to determine if there are misleading contents.
The last primary type is the preferred stocks. This type of investment involves the most risks among the three primary types. It has some characteristics that common stocks and bonds also have. It may not have a maturity date like bonds but pays fixed dividend every year like bonds. Like the process of paying the bondholders before the shareholders, preferred stockholders are also paid with their dividends before the common stockholders but it doesn’t mean that company is going bankrupt.
The above mentioned investments are just the primary types of fixed income investments. There are much more types of investments out there for you to explore. A wide range of choices waits for people that are planning to get involved in a certain investment. Whatever investment you choose, understanding not only the benefits but also the drawbacks as well as the risks involved are very important.
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