# Types of Investments

Part of the Personal Management Merit Badge Digital Resource Guide: [Introduction & Overview](https://merit-badge.university/merit-badges/personal-management/guide/index.md)

*Saving & Investing*

> **5.** Explain to your counselor what the following investments are and how each works:
>
> a. Common stocks
>
> b. Mutual funds
>
> c. Life insurance
>
> d. A certificate of deposit (CD)
>
> e. A savings account
>
> f. A U.S. savings bond.

### The Investment Lineup

In [Requirement 4](https://merit-badge.university/merit-badges/personal-management/guide/req4/), you learned the principles of investing — risk, return, diversification, and compound interest. Now it is time to meet the specific tools. Think of these six investment types as different tools in a toolbox. Each one has a purpose, and smart investors use a combination of them.

![An illustrated lineup of six icons representing different investment types: a stock certificate, a basket of mixed investments for mutual funds, an umbrella for insurance, a locked safe for CDs, a piggy bank for savings, and an eagle for U.S. savings bonds](https://ik.imagekit.io/doulacoop/tr:w-800/mbu-assets/merit-badges/personal-management/guide/investment-types-overview?v=a439ee67)

### Requirement 5a: Common Stocks

When you buy a **stock**, you are buying a tiny piece of ownership in a company. If the company does well and grows, your piece becomes more valuable. If the company struggles, your piece loses value.

**How stocks make you money:**
- **Price appreciation:** You buy a stock for $50, and it grows to $75. You can sell it for a $25 profit.
- **Dividends:** Some companies share profits with shareholders by paying dividends — regular payments (usually quarterly) for each share you own.

**The risk:** Stock prices go up and down daily, sometimes dramatically. A single company's stock can lose most of its value if the company has serious problems. That is why diversification — owning many different stocks — is so important.

> **Did You Know?**
>
> The New York Stock Exchange, where many stocks are bought and sold, was founded in 1792 under a buttonwood tree on Wall Street in New York City. Today, trillions of dollars in stocks are traded electronically every day.

### Requirement 5b: Mutual Funds

A **mutual fund** pools money from many investors and uses it to buy a collection of stocks, bonds, or other investments. A professional fund manager decides what to buy and sell within the fund.

**Why mutual funds are popular:**
- **Instant diversification:** Instead of buying one stock, you own a piece of dozens or hundreds of investments
- **Professional management:** A fund manager does the research and makes decisions
- **Accessibility:** You can invest with relatively small amounts of money

**The trade-off:** Mutual funds charge fees (called an **expense ratio**) that reduce your returns. Index funds — a type of mutual fund that simply tracks a market index like the S&P 500 — tend to have much lower fees and often outperform professionally managed funds over long periods.

### Requirement 5c: Life Insurance

Life insurance is unusual on this list because it is primarily a **protection product**, not a pure investment. When someone buys a life insurance policy, they pay regular premiums. If they die while the policy is active, the insurance company pays a lump sum (called a **death benefit**) to the person's beneficiaries — usually their family.

**Why it is listed as an investment:** Some types of life insurance (called **whole life** or **universal life**) include a savings component that builds **cash value** over time. You will learn more about the differences between whole life and term life in [Requirement 6](https://merit-badge.university/merit-badges/personal-management/guide/req6/).

**Who needs life insurance:** Primarily people whose families depend on their income. If a parent earns the family's main income and dies unexpectedly, life insurance helps the family pay bills, mortgages, and living expenses.

### Requirement 5d: Certificate of Deposit (CD)

A **certificate of deposit (CD)** is like a savings account with a lock on it. You deposit a fixed amount of money for a set period — called the **term** — and in return, the bank pays you a higher interest rate than a regular savings account.

**How CDs work:**
- You choose a term (common terms: 3 months, 6 months, 1 year, 2 years, 5 years)
- The bank pays a fixed interest rate for the entire term
- When the term ends (called **maturity**), you get your money back plus the interest earned
- If you withdraw early, you usually pay a penalty

**When CDs make sense:** When you have money you know you will not need for a specific period and you want a guaranteed, predictable return with virtually no risk.

> **Tip**
>
> A strategy called **CD laddering** involves buying CDs with different maturity dates. For example, you might buy a 1-year, 2-year, and 3-year CD. As each one matures, you reinvest it. This gives you regular access to some of your money while still earning higher interest rates.

### Requirement 5e: Savings Account

A **savings account** is the most basic and accessible place to keep money. You deposit money at a bank or credit union, earn a small amount of interest, and can withdraw your money whenever you need it.

**Key features:**
- **FDIC insured** (up to $250,000 per depositor, per bank) — your money is protected even if the bank fails
- **Liquid** — you can access your money at any time
- **Low return** — interest rates are typically lower than other investments
- **No risk** — your balance will never go down (the interest rate might change, but your principal is safe)

**Types of savings accounts:**
- **Regular savings:** Basic account, lowest interest rate
- **High-yield savings:** Online banks often offer significantly higher rates because they have lower overhead costs
- **Money market accounts:** Slightly higher rates, may require a higher minimum balance

### Requirement 5f: U.S. Savings Bond

A **U.S. savings bond** is a loan you make to the federal government. You buy the bond, and the government promises to pay you back with interest after a certain period.

**Two main types:**
- **Series EE bonds:** Guaranteed to double in value over 20 years. They earn a fixed interest rate.
- **Series I bonds:** Earn a combination of a fixed rate plus an inflation rate that adjusts every six months. These protect your money from losing purchasing power due to inflation.

**How to buy them:** U.S. savings bonds are purchased online through [TreasuryDirect.gov](https://www.treasurydirect.gov). You can buy them for as little as $25.

> **Did You Know?**
>
> During World War II, the U.S. government sold "war bonds" to help fund the military effort. Scouts actually helped sell them — going door to door in their communities. Over $185 billion in war bonds were sold, with ordinary Americans funding a huge portion of the war effort.

### Putting It All Together

Here is how these investments compare:

| Investment | Risk Level | Liquidity | Typical Return | Best For |
|---|---|---|---|---|
| Savings account | Very low | High | 1–5% | Emergency fund, short-term goals |
| CD | Very low | Low (locked in) | 2–5% | Money you will not need soon |
| U.S. savings bonds | Very low | Low (penalties if cashed early) | 2–5% | Long-term, safe growth |
| Mutual funds | Medium | Medium | 7–10% (historical average) | Long-term growth, diversification |
| Common stocks | High | High | Varies widely | Long-term growth (with research) |
| Life insurance | Low (cash value) | Low | Varies | Family protection + slow growth |

[Investor.gov — Types of Investments](https://www.investor.gov/introduction-investing/investing-basics/investment-products): The SEC's guide to different investment types, with clear explanations of how each one works, its risks, and its benefits.

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- Previous: [Saving vs. Investing](https://merit-badge.university/merit-badges/personal-management/guide/req4/index.md)
- Next: [Understanding Insurance](https://merit-badge.university/merit-badges/personal-management/guide/req6/index.md)