A company, let’s call it Facebook (which is not really public … yet) decides to raise capital so that they go “public”, by doing so they are creating capital for individuals. So “Facebook” is now considered an IPO, Initial Public Offering. (Which is a long and extended process) Consequently, individuals can “buy” shares and then “sell” shares. Since 1926, the average large stock has returned about 10% annually. If you’re saving for retirement, it’s a good deal, much better than US savings bonds or keeping cash under the mattress.
However, according to CNNmoney.com, they note that:
Since World War II, Wall Street has endured several bear markets, defined as a sustained decline of more than 20% in the value of the Dow Jones Industrial Average.
But it is important to understand that with every decline there will be a growth tilt or a bull market. In short, it should be noted that the economy is cyclical in nature.
A debt investment in which an investor lends money to an entity (corporate or government) that borrows the funds for a defined period of time at a fixed interest rate. The bonds are used by US and foreign companies, municipalities, states, and governments to finance a variety of projects and activities.
There are several types of bonds available to investors. Each has its own pros and cons. But each link has a rank. Check the rating of Moody’s or Standard and Poor’s bonds. The three highest ratings are aaa, AA, or A. The higher the rating, the lower the risk of return.
US Savings Bonds, Series E and Series H Bonds
Series H bonds pay interest semi-annually at a typical rate of 4.29% for the first year and then a fixed rate of 5.10% for the next nine years until maturity.
Series E bonds are sold at 75% of their face value and mature at 100% in 5 years 10 months after purchase; Equivalent to 5% compounded semi-annually.
These bonds are subject to federal income tax, but are exempt from state income tax.
AAA rating
Other United States Bonds
These bonds are corporate / business bonds but are backed by the government.
Slightly higher rates of about 1% more than US savings bonds.
State and municipal bonds
These bonds are exempt from federal income tax and state income tax for the state in which the bond is issued.
The yield on these bonds varies with both quality and maturity, with the shorter maturities giving the lowest yield.
Corporate bonds
Subject to federal and state taxes.
These bonds are issued by corporations and their quality depends on the company itself. For example, The highest quality yielded approximately 7% interest for a maturity of 25 years. While a lower-rated issue-BAA- returns with a maturity of approximately 8%.
In general, by sacrificing quality, an investor can earn a higher return on their bonds. But the best bonds to invest in are government-sponsored corporate bonds. These are extremely low risk (almost 0) and still provide a higher interest rate than Savings Bonds.