Which Investment Type Typically Carries the Littlest Risk?
- Money Market Accounts
- Preferred Stock
- Savings Account
Money Market Accounts
A money market account has some advantages, including flexibility and liquidity. Money market accounts typically allow for six transactions a month, including a few check writings. Many money market accounts also allow you to link a debit card for access to funds without incurring fees. You can also withdraw money at any time without penalty, making them an excellent choice for emergency funds and larger expenses. However, money market accounts are not for everyone.
A money market account is similar to a savings account, and it earns interest, just like a regular savings account. Money market accounts also give you some checking account access. While there are restrictions, most banks allow up to six withdrawals or payments per month. Withdrawals made via ATM, check, or messenger are not counted toward the limit. A money market account may also have a minimum balance requirement, so you should read the fine print before opening one.
While most investors associate bond risk with volatility, it can mean a number of things. In addition to a loss of purchasing power, bond risk can mean missing your long-term target return, or permanent loss of capital. In fact, over a 25-year period, stocks have consistently beaten bonds. Investors can purchase bond funds at most brokerage firms. Individual bonds can also be purchased directly from issuers. Many retail investors turn to a financial advisor to purchase bonds for them.
The amount of risk a bond carries depends on how long it will last. Short-term bonds typically mature within three years, while medium-term bonds typically last between four and 10 years. Long-term bonds are generally considered the most risky because of the possibility of adverse events that will affect the bond's value. Nonetheless, long-term bonds typically offer higher coupon rates. This can make them the best investment options for investors.
Preferred stocks are issued by companies and are traded on exchanges similar to common stocks. However, most companies do not issue preferred, which makes the market for them relatively small and has limited liquidity. Common issuers of preferred stock are utilities, banks, and real estate investment trusts. Before investing in preferred stocks, investors should check the company's credit rating, as well as the dividend yield and capability. Some preferred may also be convertible.
Another difference between common and preferred stocks is that preferred stock typically has lower risks. Preferred stockholders are paid dividends before common stockholders and are typically the first to receive the money if the company is liquidated. Because preferred stock investors have priority over common stockholders, they carry lower risk than common stockholders. Thus, they are more appealing to investors. This makes it an excellent investment for long-term retirement funds.
A savings account typically carries the least risk, but you should consider the fees associated with your account before signing up. Banks often charge a monthly fee to maintain a savings account, and if you're not able to maintain that minimum balance, you may have to pay the fee. Some banks waive this monthly fee for people who meet certain minimum balance requirements, but these are not a guarantee and you may have to look elsewhere for a savings account.
A savings account is one of the safest ways to store money, earning a small amount of interest while maintaining a relatively low level of risk. Savings account interest rates vary by financial institution, but most earn between 0.01% and 2% annual percentage yields. However, you can find better savings account rates by investing in other financial options such as stocks or bonds. The lower interest rate, however, may not be enough to meet your long-term goals.
While there are many benefits to CDs, they also carry some risk. For example, investors may lose money if the account is inactive for a long time. CDs are often rated as a low-risk investment because the interest they earn is stable. They are also considered to be high-quality investments. The rate of interest you can earn on CDs depends on a variety of factors. The longer your CD is, the higher its interest rate will be. If you have a large deposit, you may be able to get higher rates.
In addition to low risk, CDs may be callable. A callable CD allows the issuing bank to make interest payments prior to the stated maturity date. If the issuing institution does this, you will have to reinvest at a lower interest rate. However, CDs are insured by the Federal Deposit Insurance Corporation (FDIC).