Retail investors are individuals who independently invest their own money in a variety of asset classes—such as stocks or bonds—through brokerage firms or their retirement accounts. Institutional investors, on the other hand, are companies or organizations managing pensions, hedge funds, endowments, and mutual funds, that are investing on behalf of a group of investors.

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A fixed income investment is the purchase of a bond or certificate of deposit (CD) that has a predetermined, set interest rate. Investors are paid interest annually until the bond or CD matures, at which point they recoup their initial investment. Fixed income investing can be a lower-risk strategy compared to investing in stocks. The objective is to preserve capital and income.

Governments and corporations often fund operations and projects by selling debt securities. For example, a company may issue a $5,000, 10-year bond with a 3% interest rate. If you purchased that bond and held it to maturity you’d be paid $150 annually for 10 years (3% of your investment amount). At maturity, you would also recoup your $5,000 investment.

Certain fixed income investments provide a guaranteed return—U.S. Treasuries, for example, are backed by the full faith and credit of the Constitution—and many are generally safer than stocks, although no investment is risk-free. There are a number of risks to be considered with fixed income investing, such as the potential that an entity might go bankrupt and not be able to pay back bondholders. Credit ratings can provide an indication as to an entity’s creditworthiness. The higher the credit rating of a company or government, the more likely it will be able to pay back its bondholders. An additional risk is inflation; if inflation rates outpace a bond or CD interest rate, bondholders will have lost purchasing power on the money they invested.

CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.

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Value investing involves attempting to identify and then buy a stock whose price you believe to be undervalued. When you’re right, you’ve in effect bought that stock at a discount.

This long-term investment strategy is based on deep analysis of a company’s characteristics and potential. Value investors might study metrics including price-to-earnings ratio, cash flow, competitive advantage, target market, and business model.

Value investors look for opportunities born out of investor overreactions. They believe that investors are prone to making emotional decisions based on good or bad news and attempt to take advantage of a dip in stock price.

Value investments can perform differently from the market as a whole.  They can remain undervalued by the market for long periods of time.

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Yield to maturity (YTM) is the annual rate of return on a bond if you did not sell it before it matured. It is expressed as a percentage. YTM includes all the interest the bond would pay annually, known as coupons, plus recoupment of your original investment after the bond matured. It is a useful tool for fixed income investors to compare bonds with different coupons and maturity dates.

YTM is a complex calculation and meant only as a projection. It assumes all interest or coupon payments are reinvested at the bond’s current yield, which may not always be possible or even likely. The formula factors in the bond’s current market price, the coupon payments, the recoupment amount, and the term to maturity. Because a bond’s coupon interest rate fluctuates, YTM on any given bond will fluctuate. YTM does not take into account taxes paid by the investor or investment costs related to the purchase.

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