The four investing categories

People frequently ask me about the basics of investing. For the pros, this might serve as just a reminder of the fundamentals. For beginners or those who don't feel comfortable with investing, let me start on the first rung of the ladder.

Investments can be broken down into some basic categories, each with its own primary purpose. People generally invest their dollars into four main categories: cash, stock, bonds and real estate

Of course, there are other categories such as oil and gas, commodities and collectibles (lottery tickets are not a category), but the majority of individual investment money is focused on the big four.


Cash is more than what you carry in your pocket or purse. It includes checking accounts, savings accounts, money-market accounts, anything that can be turned into cash fairly quickly.

Most bank products fit into this category, even certificates of deposit. While they have maturity dates, they can be turned into cash if the holder pays a nominal penalty.

The primary investment purpose of these instruments is to provide you with an income. In most cases, it is simply interest income. What it is NOT, is growth. The interest income from cash accounts can grow, but it is not really a "growth" investment.

Let's move to bonds. They come in a variety of packages such as U.S. government bonds, corporate bonds and municipal bonds. No matter who issues them, they are similar. As with cash, this category is primarily designed to provide you with income, again usually interest income. Bonds are not growth investments.

Bond issuers promise to pay their investors a particular interest rate, and they have a maturity date that indicates when the principal will be repaid.

Stocks also come in a variety of shapes and styles but are primarily growth investments. You do not get an interest rate or a maturity date. You pick a company based on factors such as management, product, longevity and past performance.

If the stock is a winner, your investment return is going to be the gain on the price of the stock. For example, you buy it for $10 and sell it for $15, that growth is your profit. You may or may not be paid a dividend, or earnings distribution.

Finally, there is the real estate category. Everyone knows what it is, but the investment purpose of real estate is very much like stocks. Most of the money made in real estate is not the income but the growth in the value of it. And, as they say in this business, it's all about location, location, location.

Income is generally taxed at the ordinary income tax rates. Growth, if long term, is taxed at a lower capital gains rate.

When starting out, ask yourself: What is your primary purpose for the money you are about to invest? Do you want income or growth? The answer should lead you to invest in a category that is primarily aligned with your investment goal. Do not put all of your money in just one category. Instead, seek diversification and balance.
Tom Sullivan:
By Tom Sullivan - Bee Columnist
Published 12:00 am PDT Sunday, April 1, 2007
Story appeared in BUSINESS section, Page D1