Our attorneys regularly write about what happens and what to do when investments go wrong. We have discussed everything from stock broker fraud to the implications of national debt crises for individual investors. In this article, we are getting back to basics.
Whether you are a first-time investor or a retiree with a lifetime of savings in an investment portfolio, it is important to know where your money is going. This means more than just finding a trustworthy broker (though this is extremely important as well). It also means having at least a basic understanding of the products in which you are investing.
Only by gaining this understanding can you have meaningful discussions with your broker, make informed decisions about your investments and keep a watchful eye for situations where there may be issues with your broker’s trades.
With these considerations in mind, what follows is an overview of the primary types of investments that are available to U.S. investors.
A hedge fund is a vehicle through which multiple investors’ funds are pooled and then invested in a selection of stocks, bonds and other financial instruments. There is a manager who typically makes investment decisions using diverse strategies and “hedging” techniques in order to earn a satisfactory return without exposing the entire fund to a single risk. Hedging is the practice of taking offsetting positions on a single investment in order to protect against uncertainties in the market.
Hedge funds are presently available only to institutional and sophisticated investors and for that reason are largely unregulated. When managed appropriately, they can be valuable additions to an investment portfolio. However, when managers commit fraud, investors can suffer catastrophic results.
The term “securities” typically refers to three different types of investments:
- Stocks – Also known as “equity securities,” stocks are ownership interests in publicly-traded companies. If you purchase stock in a company and the company does well, the value of your investment will rise. Likewise, if the company’s value decreases, so does the value of your stock. When most people talk about investing, they are talking about investing in stocks.
- Bonds – Also known as “debt securities,” bonds are loans to public companies or government entities. With a corporate bond, you earn interest at a steady rate rather than riding the success or failure of the company. However, the returns on a bond are typically less than the potential returns on a stock investment. Government bonds are even more secure, but offer an even lower return.
- Options – When you purchase an option, you are purchasing the right to buy or sell a stock or other investment over a period of time or at a specific point in the future. When used properly, options can be useful tools for diversification and reducing your investment risk.
Many brokers also invest in mutual funds, which are similar to hedge funds but focus on securities and are available to casual investors.
Other Investment Types
Along with hedge funds, mutual funds and securities, U.S. investors have access to a seemingly unlimited and constantly-growing number of alternative investment opportunities. As a casual investor, you should be cautious of brokers who try to get you to invest in “opportunities” such as:
- Equity-Indexed Annuities
- Exchange-Traded Funds
- Structured Products
- Private Investments
While these can all be appropriate investments under the correct circumstances, complicated investment products can also present extraordinary risks for portfolio losses and broker fraud.
Investment Fraud Attorneys in the Heart of Wall Street | Zamansky LLC
The attorneys at Zamansky LLC have decades of experience representing individuals and institutional investors in cases of investment fraud. To inquire about our services, please contact us today.