Various types of investments have different risk-return relationships. On one hand, the least risky investments offer the least amount of return. On the other hand, the riskiest investments offer the greatest return.

Investing is not for everyone, and the level and type of investments is personal and depends on the investor’s risk tolerance level.

Investment portfolios should be allocated, or spread out, among different types of investments, such as stocks, bonds, and cash, to further reduce investment risk. Asset allocation changes as investors reach life milestones; portfolios should be adjusted and rebalanced periodically.

Stocks are issued in this manner:

• The first issue of stock is an initial public offering (IPO).

• A financial adviser coordinates the preparation of a prospectus and files it with the Securities and Exchange Commission (SEC).

• Financial advisory firms establish the best timing for the public sale and determine the initial selling price.

• Banks form a syndicate to underwrite the IPO. The syndicate then purchases the stock and sells it to the public.

There are two main types of stocks that companies issue: common and preferred. Stocks can be categorized into five categories: income stocks, blue chip stocks, growth stocks, cyclical stocks, and defensive stocks.

Stocks are purchased through a stockbroker who buys and sells stocks on behalf of investors. Brokers also provide advice and receive a fee for their services.

Stock transactions occur through a stock exchange like the NYSE Euronext or the NASDAQ.

Stock performance is typically measured by the fluctuation in price. When stock price increases, the stock shows good performance. Conversely a decrease in price indicates a poor performance.

Stock prices change in reaction to supply and demand. Other factors that can affect stock prices include economic forecasts, industry or sector concerns, or global events. Stocks also tend to move together as a market. If the market is trending positively, it is a bull market. A declining market is a bear market.

Bonds are issued in the same manner as stock, with a few slight differences:

• The company contacts an investment bank for advice.

• Investment bankers prepare documents with the SEC. They also help to set the price of the bond issue and take the lead in forming the group of banks that initially buy the bonds.

• Financial advisers and bankers generate interest and locate potential buyers for the bonds before issuance.

• Investment banks initially purchase all the bonds at a discount and then quickly sell them in the primary market at a higher price.

A bonds is characterized by its par (face) value, which is the money the bondholder will get back once a bond reaches maturity. Most bonds sell at par value. A bonds is also characterized by the coupon (interest rate), and maturity date.

Bonds are not risk free. The creditworthiness of the issuer is the main factor affecting a bond’s risk.

There are two issuers of bonds: governments and corporations.

• Corporate bonds are issued by corporations and hold the greatest amount of risk. Secured bonds are backed by collateral, and debenture bonds are ­unsecured and backed only by a promise to pay.

• Government bonds are issued by national governments and are the safest investment.

• Municipal bonds are issued by state and local ­municipalities.

Mutual funds are popular investments because they provide diversification and professional management. Mutual funds are extremely liquid and fairly cost efficient.

Load funds have additional costs to cover marketing and other fund expenses, whereas no-load funds) have little or no additional costs.

Money market funds invest in short-term debt obligations. The interest rate for these funds is often nearly double that of “regular” interest-bearing checking or savings accounts. In addition, money market accounts provide check-writing privileges so you have quick access to the money.

Bond mutual funds consist solely of bonds. They can be categorized by the type of bond (municipal bond funds, corporate bond funds, or U.S. government bond funds). Alternatively, some bond funds are categorized by maturity (long-term, short-term, or intermediate-term bond funds).

Stock mutual funds, also known as equity funds, Equity funds are categorized by investment strategy, such as growth and value funds. These funds are also categorized by size of the companies in which they invest, such as large-cap funds, medium-cap funds, and small-cap funds.

Blend (or balanced) funds are mutual funds that invest in stocks, bonds, and sometimes money market funds to offer a mix of safety, income, and modest appreciation. A life cycle fund is a type of balanced fund that is managed to become more conservative as it approaches a target date, which often closely matches an investor’s anticipated retirement date.

An option is a contract that gives a buyer the right (but not the obligation) to buy or sell a security at a specific price on or before a certain date. Options are complicated and therefore quite risky.

Futures contracts are agreements between a buyer and a seller to receive (or deliver) an asset sometime in the future but at a specific price that is agreed on today.