Final answer:
The three major types of equity accounts are investments, drawings/withdrawals, and retained earnings. Equity represents ownership interest and includes the money returned after liquidation of assets and settling debt. Investment options for households include various assets with different levels of return, risk, and liquidity.
Step-by-step explanation:
The three major types of equity accounts are investments, drawings (or withdrawals by the owner for personal use), and retained earnings. Equity represents the owner's interest in a company and is the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off.
When owners of a business invest their funds, they're buying into the company's equity, this can come in the form of early-stage investments or by selling stock. Additionally, retained earnings are a part of equity and represent the portion of the business's profits that are not distributed to shareholders but rather are reinvested in the business or used to pay off debt. This reinvestment strategy is how a company can grow by reinvesting profits.
Households, as suppliers of capital through savings, have various investment options such as bank accounts, certificates of deposit, money market mutual funds, bonds, stocks, stock and bond mutual funds, housing, and tangible assets like gold. These investment choices balance the expected rate of return, risk, and liquidity.
The expected rate of return is how much income an investment is predicted to generate; risk is the potential for an investment's actual return to differ from the expected return; and liquidity refers to how easily an investment can be converted to cash without significant loss of value.