Savings account (regular passbook or statement)

Chief features. Easily opened at commercial banks, savings & loan (S&L) associations, and credit unions. Frequency of compounding the interest varies.

Advantages. Can use as collateral for a loan. Usually government-insured. Interest may be credited from day-of-deposit to day-of-withdrawal. Funds are liquid.

Disadvantages. Interest rates are regulated by law and relatively low. Interest is subject to federal and state income tax. The insured limit is $100,000 per account.

Money-market deposit accounts

Chief features. Available from banks and S&L associations. A savings account's return is based on market interest rates. Covered by federal deposit insurance.

Advantages. Savers may write a limited number of large checks. Interest is a bit higher than on savings accounts. Money is liquid, and there is no penalty to withdraw funds.

Disadvantages. There is usually a penalty for going below the minimum balance which is usually $1,000. Interest rate will float with the market and is subject to federal and state tax.

Certificates of deposit and time savings accounts

Chief features. Depositor selects number of days, months, or years to fit their goals and needs. Available at banks, S&L associations, and credit unions.

Advantages. Interest can be added to the account or paid quarterly to customer. Interest rates are higher for longer periods. Some may have unique features. Most are federally insured.

Disadvantages. Funds are not totally liquid because there is a penalty for withdrawal before maturity date. The minimum deposit may be too large for some customers. Interest is subject to federal and state income tax.

U.S. savings bonds, Series EE

Chief features. Easily bought at financial institutions or through payroll deduction. Face value ranges from $50 to $10,000. The purchase price is 50 percent of face value (for example, $25 for a $50 bond).

Advantages. Safety backed by U.S. government. Replaced free if lost or stolen. Can be redeemed before maturity. No fee for buying or redeeming. Interest is exempt from state and local taxes; can be exempt from federal tax if used for tuition.

Disadvantages. Can't use as collateral. Interest is subject to federal income tax when redeemed. Long time until maturity; interest rate tied to intermediate US treasury securities; lower interest if redeemed early. Doesn't provide current income. Stops paying interest after 18 years.

U.S. savings bonds, Series HH

Chief features. U.S. government HH bonds are bought at their face value of $500, $1,000, $5,000, or $10,000.

Advantages. Semiannual interest checks are mailed to bondholders. Interest is exempt from state and local taxes. Bonds mature in 20 years. Safety backed by U.S. government.

Disadvantages. Can only be obtained in exchange for already owned E or EE bonds; cannot be purchased with cash alone. Bonds redeemed early are cashed in at less than face value. Interest subject to federal taxes when received.

Corporate bonds

Chief features. Represents a loan to a company. Receive certificate with printed interest rate, maturity date, and face value amount received at maturity by bondholder.

Advantages. Rated for safety by independent services such as Moody's and Standard & Poor. Earn return by buying at discount (below face value) and/or selling at a premium (above face value) before its maturity date.

Disadvantages. It will be a long time until maturity unless you buy older bonds nearer maturity. Some bonds are callable (company has right to redeem before maturity date). As interest rates go up, bond yields go down. Interest subject to federal and state tax.

Municipal bonds (often called tax-exempt bonds)

Chief features. Long-term loans by investor to a state or local government or related agency. Bought through a broker. Receive certificate with printed face value, maturity date, and interest rate. Interest usually paid twice a year.

Advantages. See information on corporate bonds. Municipal bonds are also exempt from federal income tax. In some states, they are exempt from state and local taxes. Some have insurance that guarantees repayment of principal and interest. General obligation bonds are usually safer than revenue bonds.

Disadvantages. Because interest rate is fixed, buyer may earn more or less than other investments pay. Capital gains (your profit) on the interest and sale of "munies" are subject to state income tax unless it is a state exempt issue. Risk varies considerably.

Corporate stocks

Chief features. You are a partial owner of a company traded on a stock exchange (such as New York) or over the counter (OTC). If you do not buy directly from the company, you will pay a commission. Brokers and financial institutions charge commissions for buying or selling. Round lot are orders for 100 shares; fewer than 100 are odd lot. Prices are quoted in dollars and eighths of dollars (72-1/8 or 36-7/8). Preferred stocks pay a fixed dividend. Some common stocks pay no dividend.

Advantages. Price per share may be low and you can buy a small number of shares. Gain on investment comes from selling at a price higher than you paid. There is no time limit on owning stock. Dividends, or your share of the company's profit, are paid quarterly. You may be able to reinvest dividends and interest to buy additional shares. Stock splits increase the number of your shares but not the value.

Disadvantages. Dividends are subject to federal and state income tax. There is no guarantee of dividends on common stock. Stock prices drop with high inflation, and you may lose money if stock is sold at a lower price than you paid. There is a risk that the company will go bankrupt. Prices are subject to market volatility, world conditions, and interest rate variation. Requires time to monitor investment.

Federal agency debt issues (bonds)

Chief features. Debt securities issued by federal agencies such as the Federal National Mortgage Association (FNMA, Fannie Mae), the Federal Housing Administration (FHA), and the Government National Mortgage Association (GNMA, Ginnie Mae).

Advantages. Very low risk. Maturities range from 1 to 40 years, with an average life of 40 years. Yield varies from 7 to 9 percent and can be sold at anytime. Used as a source of income. Disadvantages. Minimum purchase denomination usually $5,000. Interest subject to state and federal tax.

Mutual Funds

Chief features. Buy shares in company that owns a diversified group of stocks, bonds, and/or other investments. Many offer multiple funds, each with a different objective such as growth, aggressive growth, growth and income, or international growth.

Advantages. Diversification and professional management available to small investors. Requires small initial investment. Can buy shares through broker, fund's sales representative, or directly from the fund. Can choose from a wide variety of portfolios, each with its own set of investments, objectives, risks, and rewards. Some have minimum purchase requirements.

Disadvantages. No agency directly insures safety of invested principal and earnings (the Security and Exchange Commission (SEC) has requirements that provide certain protection to consumers). Not federally insured even if bought from financial institution. Price fluctuates with changing economic conditions. Some very safe, others quite risky. Subject to federal and state income tax. Some charge sales fee (load); others (no-load) don't. Management and yearly administration fees plus 12b-1 (marketing) fees may prove costly.

Money market funds

Chief features. A type of mutual fund available from brokers, private investment companies, and directly from fund. Money is invested in short-term debt securities. Some only invest in U.S. government debt. Each share usually valued at $1.00.

Advantages. Can withdraw part or all of investment without charge. Interest figured daily. Yields often higher than other savings choices. In a fund family, one can often switch from a money market fund to a mutual fund without charge. Some send monthly statements. Small deposits often allowed after fund is started.

Disadvantages. No agency directly insures safety of investor's funds (the SEC has requirements that provide certain protection to consumers). Yield (interest) fluctuates with changing economic conditions. Subject to federal, state, and local tax. Minimum initial deposit requirements. Limited check-writing ability.

U.S. treasury bills

Chief features. $10,000 minimum purchase. Buyer receives receipt (not a certificate) as evidence of purchase. New bills sold at scheduled auctions at discount; prices set by investor's bidding. Buyer chooses 3, 6, 9, or 12 months to maturity and may renew.

Advantages. Safety backed by U.S. government. Buyer gets check promptly for interest (difference between $10,000 and auction price). Interest is exempt from state income tax. Considered nearly risk-free. Used as reference point of risk for other securities.

Disadvantages. High initial expense. Interest is subject to federal income tax. Buyer sends his or her money without knowing exact price until after auction. Bills may lose interest if sold before maturity and are more expensive if not bought directly through auction.

U.S. treasury notes and bonds

Chief features. Maturity of notes ranges from 2 to 10 years. Bond maturities are usually 10 years or longer. Issued in $1,000, $5,000, $10,000, and higher amounts. Receive registered certificate with owner's name; semi-annual interest mailed to owner. Bought through competitive bid at auction.

Advantages. Interest is exempt from state income tax. Active secondary market for notes and bonds. Considered a safe investment.

Disadvantages. Buyer doesn't know price until after competitive bidding at auction. Not subject to state and local tax but is subject to federal income tax.