A major type of investment are those in which you lend your money. Suppose that, like most people, you keep some money in your local bank - most likely in a checking account but perhaps also in a savings account or certificate of deposit (CD). No matter what type of bank account you place your money in, you are lending your money to the bank.
How long and under what conditions you are lending your bank the money depends on the specific bank and account you are using. With a CD, you commit to lend your money to the bank for a specific length of time - perhaps six months. In return, the bank pays you a higher rate of interest than if you put your money in a bank account offering immediate access.
As you later discover, bonds are another type of lending investment. When you purchase a bond that has been issued by the government or by a company, you agree to lend your money for a predetermined period of time and receive a particular rate of interest. A bond may pay you 6 percent interest over the next four years, for example.
Lending investments are all the same in that instead of directly sharing in the ownership of a company or other asset, such as real estate, you are lending your money to some organization that in turn is investing it. If you lend your money to Microsoft through buying one of its bonds that matures, say, in 10 years, and Microsoft quintuples in size over the next decade (or year, as the case may be), you won't share in its growth. Microsoft's stockholders and employees will reap the rewards of the company's success, but as a bond holder, you won't.
Cash equivalents
Cash equivalents are any investment that can quickly and without great cost be converted into cash. Of course, cash in your wallet qualifies. With most checking accounts, for example, you can write a check or withdraw cash by visiting a teller - either the live or the mechanical automated type.
Money market mutual funds are another type of cash equivalent. Investors, both large and small, have hundreds of billions of dollars in money market mutual funds because the best ones have higher yields than bank savings accounts. Why should you sacrifice 1, 2, 3, or 4 percent of "free" yield? The reason more than a few bank savers do sacrifice this yield is that they think money market funds are risky - they're not. Money market mutual funds generally invest in ultra-safe things such as short-term bank certificates of deposit, U.S. government-issued treasury bills, and commercial paper issued by the most credit-worthy corporations. The yield advantage of a money market fund almost always widens when interest rates increase because banks move about as fast as molasses on a cold winter day to raise savings account rates.
One reason people keep too much money in traditional bank accounts is that the local bank branch office makes the cash seem more accessible. Money market mutual funds, however, offer many quick ways to get your cash. You can write a check (most funds stipulate the check must be for at least $250) or call the fund and request that they mail or wire you money.
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