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A fixed annuity is actually a sort of contract with an insurance company. The agreement calls for the company to pay the same sum at regular intervals for a set period of time. Since it functions sort of like a salary, annuities are very popular among people who have retired or are nearing retirement. When buying an annuity, investors will generally invest a lump sum with the insurer.
This money is repaid to them, with interest, over time. Their habitual payments typically end with their death or the death of a beneficiary i. The major downside is that if an investor dies before collecting the full amount of their annuity investment, that leftover money may be passed onto the company that sold it to them rather than their surviving family. Like bonds, certificates of deposit CDs offered by banks and credit unions are a slightly better-paying alternative to the average savings account.
And they work in a similar way. You buy a CD by depositing a lump sum in an account at the financial institution. In layman's terms, you're giving them a loan. The CD earns interest for a set period of time — between six months and 10 years, depending on the CD. When the time's up, you'll get back your initial deposit.
Most forms of fixed-income investing don't give you equity, or ownership, in anything. Even corporate bonds function merely as a loan to the company. But preferred stock is sort of the best of both worlds — the prime features of both bonds and stock shares. Preferred stock are shares in a company.
They offer regular dividends, which come from the company's profits, that are paid out in a fixed amount every quarter — like bond interest. The payment doesn't typically fluctuate the same way a common share dividend does, and it's usually higher, too.
But since preferred shares are stocks, they do trade on the market, and they can appreciate in price — especially if the company does well. However, they don't grow as much as common shares do. Preferred stock is riskier than other fixed-income vehicles because it's tied to a company's success. If a company runs into serious financial trouble, it might have to suspend dividend payments — though preferred shareholders still get paid before common shareholders.
There's also the risk that the company could recall force a buyback of its preferred shares — or convert them to common shares. Though risk is limited with fixed-income investments, it still exists. Risks include:. Along with investors requiring money, fixed-income investments are a great place to start for beginning investors.
They don't always require the same intimate market knowledge as equities and they're much less volatile. For the same reason, they don't offer the highest returns — and no capital appreciation in the long term. But they can serve as a better alternative to a traditional savings account. Overall, a good portfolio diversification strategy will include some sort of fixed-interest investments, too. Times Internet Limited. All rights reserved. For reprint rights. Times Syndication Service.
Home Notifications Newsletters Next Share. Fixed-income investing is a strategy that focuses on low-risk investments paying a reliable return Advertisement. Mariel Loveland. The reliability and safety of fixed-income investments makes them useful for investors of all ages. Fixed-income investing involves assets that generate a stable and often predetermined return, usually by way of set interest payments or dividends. Fixed-income investments are typically considered low risk, and include bonds , CDs , annuities , and preferred stock.
Though relatively safe, fixed-income vehicles are subject to inflation risk and don't offer much capital appreciation or growth. Sign up for a weekly brief collating many news items into one untangled thought delivered straight to your mailbox. Email address. Next Story Investment income is money earned by your financial assets or accounts, and understanding how it works can help maximize your profits. Popular on BI. Latest Stories. Free Newsletters.
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Income investing — and fixed-income investing in particular — is the opposite of growth investing. The sort of assets that generate steady money tend not to be the type that'll appreciate in value much. On the other hand, they usually won't go down; they offer financial security, especially if you hold onto them. It's like the difference between placing a standing order to buy a dozen roses each year and planting a rose bush.
With the former, you know that you're getting 12 roses — no more, but no less. With the latter, you may get many dozens of roses, but a harsh winter could kill your plant, leaving you with no blooms at all.
There are several types of fixed-income investments. Their payouts vary, but the rates all tend to be higher than those of the average savings account. Here are the most common:. When people think of fixed-income investments, bonds are usually the first thing that comes to mind.
Government bonds, like US Treasuries , are the most common. Other types include corporate bonds and municipal bonds. In most cases, you can think of these sorts of fixed-income investments like a loan: The borrower is the bond's issuer, and the investor, rather than a financial institution, is the lender.
A bond has a set lifespan; when it eventually matures, the investor gets back what they initially paid along with added interest along the way. With short-term bonds, that could happen in one to four years. With long-term bonds, it could take as long as 10 to 20 years.
Treasury bills can even mature in less than a year. Of course, not all bonds make it to maturity. For example, if a company trading corporate bonds goes bankrupt, a lender may not get back their entire initial investment. This has never happened with US Treasuries , which is why they're considered virtually risk-free.
Also relatively safe: highly rated, or investment-grade, corporate bonds — usually issued by large, stable corporations. When it comes to risk, the issuer's creditworthiness is important. But so is the bond's lifespan —that is, how long it takes to mature. Overall, long-term bonds — particularly corporate long-term bonds — provide the highest returns, but are also considered the riskiest. This is because they're most vulnerable to interest rate hikes, which can lessen the value of the bond if an investor is trying to sell it before it reaches maturity.
There's also a lot more time for a corporation to steer off financial track and default on payments, including the eventual return of your initial investment. Short-term bonds, on the other hand, are less vulnerable to interest rate swings, and much easier to hold until maturity.
But they provide the smallest returns. Rather than purchasing an individual bond, an investor may wish to invest in a bond ETF exchange-traded fund or bond mutual funds. In both these cases, you're buying into a portfolio of bonds. This type of diversification leads to a more stable investment, and oftentimes, you'll see bond mutual funds tied into k retirement plans. Bond ETFs and mutual funds have a number of different strategies.
Some of them mix portfolios of long- and short-term bonds. Others mix low-risk US Treasuries with high- risk but high-yield corporate bonds aka junk bonds. Like buying a single bond, the average ETF or bond fund pays regular — sometimes even monthly — income. Bond mutual funds' payout is more likely to vary since their portfolios change more frequently.
A fixed annuity is actually a sort of contract with an insurance company. The agreement calls for the company to pay the same sum at regular intervals for a set period of time. Since it functions sort of like a salary, annuities are very popular among people who have retired or are nearing retirement. When buying an annuity, investors will generally invest a lump sum with the insurer. This money is repaid to them, with interest, over time.
Their habitual payments typically end with their death or the death of a beneficiary i. The major downside is that if an investor dies before collecting the full amount of their annuity investment, that leftover money may be passed onto the company that sold it to them rather than their surviving family. Like bonds, certificates of deposit CDs offered by banks and credit unions are a slightly better-paying alternative to the average savings account.
And they work in a similar way. You buy a CD by depositing a lump sum in an account at the financial institution. In layman's terms, you're giving them a loan. ETF Database provides the latest news and information in the world of exchange traded funds. You will also receive tips and helpful hints for building an investment portfolio centered on ETFs. Successful Investment is a weekly newsletter that focuses on the numbers that drive the market.
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