A financial advisor will tell you that there are many smart ways to grow your money. But you need to find the right type of financial investment for your specific needs and goals. Let’s take a look at how financial investments are defined, review common types of investments and risk factors for each, and break down how investors buy or sell them to maximize your income or profits.
What Is a Financial Investment?
A financial investment is a financial product like a cryptocurrency or a stock that is bought with the goal of making money.
Each investment has specific risks, advantages and disadvantages that will determine how and when investors buy or sell them.
Both individuals and companies make financial investments with the intent of maximizing income or earning a profit. These investments are held for a specific interval of time that is called a time horizon.
As an example, an employee beginning a career could hold onto retirement investments for a few decades, while an investment firm may hold and sell an investment within a few days.
Financial investments could involve one or many different types of assets that are usually bought or sold based on a specific investment strategy. This determines how they are combined in a portfolio.
Generally speaking, the higher the risk that an investor takes, the higher the reward a financial investment could return. As part of their investment strategy, investors must first determine their risk tolerance by evaluating how comfortable they are with making different types of investments.
The term financial investment is a broad concept that has both financial and economic definitions.
Financial Investment vs. Economic Investment
Many people use both terms interchangeably, but they are in fact different. Whereas financial investments are bought with the intent of making money, economic investments are purchased to improve the productivity of a company and ultimately raise its profit margins and stock value.
Economic investments only include real assets or tangible investments like equipment, machinery, materials, real estate and human capital (referring to employees). By comparison, financial investments include stocks, bonds, mutual funds, among other assets, as well as economic investments like land, buildings and more real assets.
You should note that both financial and economic investments can be interdependent. A company, for instance, could use income or dividends from financial investments to pay for economic investments. And a company could also use profits from economic investments to make financial investments.
13 Common Types of Financial Investments in 2024
There are many financial investments to pick from. Below we break down 13 common financial investments and accounts to save up for future investments in education, retirement and other financial goals. The list also includes practical tips for when to invest and how to open an account or buy a financial investment.
Annuities, which are insurance products, are usually low risk and can guarantee you a regular income stream for retirement. In addition to delaying taxes on earnings, this financial investment can sometimes be extended to beneficiaries. However, if you do not live long enough, you may not reach the break-even point. And fees can also be higher when compared with other investments.
When to Invest: A financial advisor might recommend investing in an annuity later in life, if you continue working and have other retirement income like a 401(k) or Social Security.
Annuities pay out the full amount of principal and interest over a specific time period that is based on the number of months between your current age and your life expectancy. So if you are 65 and your life expectancy is 80, then your monthly payment will be based on 180 months (12 months x 15 years).
How to Buy: You can buy an annuity through financial planners, insurance agents, banks and life insurance carriers. SmartAsset’s annuity reviews can help you pick the best one for your needs. Our experts break down fees, minimum initial premiums, investment options, benefit riders, taxes and more.
Bonds are fixed-income investments, which means that you know how much the return will be before buying. When you buy this financial investment, you’re lending money to the entity that issued or sold it. And upon maturity, you will get the principal or par value that you invested in the bond, as well as interest earned on top of it.
As an example, if you buy a two-year bond with a par value of $1,000 and a coupon rate of 5%, then you would get a $50 return each year, adding up to $100 total interest.
Investors combine bonds with stocks as part of a balanced investment portfolio, and adjust the ratio between the two based on age and risk tolerance. A financial advisor could recommend increasing your investment in government bonds as you get closer to retirement to protect your net worth from unexpected market losses.
When to Invest: Government bonds are great financial investments for those seeking a fixed income and low risk, especially for investors near or in retirement since they may face shorter time horizons for a return.
Corporate bonds, on the other hand, are riskier financial investments, because these loans are not backed by the government. This additional risk makes them comparable to stocks. Corporate bonds offer investors fixed-income and potentially a higher-return than municipal bonds.
Bonds issued by larger companies will usually have lower yields than those issued by smaller companies since the likelihood of going out of business is also smaller.
How to Buy: You can buy Treasury bonds directly from the U.S. Treasury, and municipal and corporate bonds through an online broker that charges a fee per trade. Brokerage firms will charge low fees as a percentage of assets, while full-service brokerages will charge higher fees and provide financial advice.
Certificates of deposit (CDs) are low-risk, low-return financial investments that have maturity dates ranging from 28 days to 10 years after your purchase date. And if you withdraw your money before your maturity date, you could face a penalty.
Comparable with bonds, if you invest $1,000 in a one-year CD with an annual percentage yield of 5%, then you would get a $50 return at the end of the year. This could be slightly higher if the issuer pays interest every month.
When to Invest: CDs are safe for risk-adverse investors who want to put away money for a fixed date in the future. These financial investments are good for building home down payments, saving for a wedding, buying a car, paying for education and even stashing your emergency fund. CDs from reputable institutions are FDIC insured up to $250,000.
How to Buy: CDs are issued by banks and credit unions. SmartAsset’s Certificate of Deposit comparison tool will help you find the best financial investment for your needs by comparing CD rates from top banks.
A commodity is a raw material or a primary product that can be bought or sold as an economic good. These goods include agricultural resources (wheat, barley, corn, oats and soybeans), renewable energy resources (solar, wind, hydropower, ethanol and geothermal), non-renewable energy resources (crude oil, natural gas, nuclear, coal and propane) and precious metals (gold, silver, platinum and palladium), among other materials and products.
When to Invest: Like with other financial investments, the most opportune moment for you to buy or sell commodities will depend on your time horizon and your financial goals. Investors sometimes treat commodities as as a hedge for their portfolios, especially during inflation, which means that they are used to minimize losses from adverse price swings in other financial investments. Experts also point out that commodities may be a good buy when the dollar gets stronger since this type of asset usually falls in price.
How to Buy: You can buy commodities in the form of futures contracts, ETFs, and indirectly through mutual funds and stocks.
Note that each type of financial investment has advantages and disadvantages. Stocks, for instance, are liquid investments that can be traded through personal brokerage accounts. Investments, however, are in commodity-related companies, which even though a commodity could be performing well the company may not.
ETFs, on the other hand, are low-fee investment options that offer greater protection, but are not available for all commodities. By comparison, futures contracts are the most direct way to invest in commodities, with the potential for strong returns, although minimum deposits are required and losses could be bigger. And finally, while mutual funds are indirectly invested in commodities, they have similar liquidity to stocks and are managed by investment advisors, but you will have to pay proprietary fees.
529 plans are often compared with 401(k) plans because both are professionally-managed investment portfolios that allow investors to contribute funds tax-free.
You should note, however, that contributions made to 529 plans can also be withdrawn free of tax to pay for qualified higher education expenses that include tuition and fees, books and supplies, computers and tech equipment, campus room and board and off-campus rent.
All states and Washington D.C. sponsor 529 plans. And while you do not have to reside in a state to invest in a plan, some states let you get additional tax benefits by making tax-deductible contributions up to certain limits.
When to Invest: Investing in college education early is a smart choice. A recent study found that less than one in five high school parents will use 529 plans to finance their children’s education. But that same study also revealed that parents who work with a financial advisor are more likely to start saving for education than those without one.
How to Open: You can open a 529 plan through a financial advisor, a broker and directly through the state plan. SmartAsset’s 529 plan comparison tool will help you pick the best one for your needs.
Exchange-traded funds combine features from both stocks and index funds into one diversified investment. They work like index funds when they track the returns of widely known indices like the S&P 500 or the Dow Jones Industrial Average, as well as smaller indices focused on market segments like biotechnology. But unlike index funds, they can also be traded like stock.
These financial investments are advantageous over individual stocks because they offer greater portfolio diversity, and investors can mitigate risk by tracking a broader index that can minimize losses.
When to Invest: ETFs can get you a lot of bang for your buck, especially when you have limited funds and can hold onto your investment for a long time. For starters, initial ETF investment requirements are smaller than many mutual fund offerings. Mutual fund companies could require a minimum investment of $3,000, whereas ETFs are flexible on how little you can invest.
ETFs also carry smaller fees, with an expense ratio as low as 0.09%. While mutual funds, by comparison, could carry expense ratios as high as 2%, which will be deducted from your investment income.
How to Buy: You can trade ETFs through online brokers, traditional brokers or dealers and robo-advisors. SmartAsset’s brokerage accountant comparison tool will help you find the best trading platform for your needs.
High yield savings accounts have generally earned higher interest rates than traditional bank savings or checking accounts. High-yield savings accounts can collect interest ranging from 3.00% to 4.00%, or even higher. And a major bank, by comparison, could pay from 0.01% to 0.35% on a savings account.
When to Invest: These savings accounts are good for rainy day funds and money that you will set aside for occasional spending like a vacation, new furniture and electronics, clothing or gift funds.
Note that these savings accounts are limited to six transactions and withdrawals per monthly statement, including transfers, ACH withdrawals, Point of Sale (PoS) transactions and transfers by phone, check or debit card. However, you can make unlimited withdrawals at ATMs and tellers at banks.
How to Open: Online banks usually offer higher rates than traditional brick and mortar banks. Our roundup of the best savings accounts can help you pick an account to grow money efficiently for your needs.
Money market accounts (MMAs), also known as money market deposit accounts, are a good financial investment alternative to traditional savings accounts, generally offering higher percentage yields.
You should note that these are different than money market funds, which are a type of mutual fund that invests in high-quality short-term debts from governments, banks or corporations; as well as cash and cash equivalents.
Comparable with high-yield savings accounts, MMAs limit transfers to six per month in compliance with Regulation D, while allowing you to make unlimited withdrawals at ATMs and tellers at banks.
When to Invest: Money market accounts offer liquidity and flexibility for investors seeking to put away rainy day funds or occasional spending like vacation, new furniture and electronics or gifts.
How to Open: You can open a money market account at a bank or credit union. SmartAsset’s money market account comparison tool will help you find the best financial investment for your needs by comparing MMA rates from top banks.
Mutual funds pool money from investors to buy a collection of different types of financial investments that are bundled and traded together as one investment. These collected assets include individual stocks, bonds and other securities.
For a comparison, individual stocks can carry higher risk and greater returns. They also require investors to buy a large number of stock to create a diverse portfolio. But mutual funds, on the other hand, can mitigate risk by hedging against losses from other investments in the fund. And they could also be an affordable option to diversify for investors since one fund already holds different types of financial investments.
You should also note that whereas an investing firm will charge you on a per-trade basis to buy individual stock, mutual funds charge operating expense ratios that could range from less than 1% to over 5%. However, while mutual funds require less time and research to invest, this convenience comes at a price – some mutual funds charge annual fees, redemption fees and front-end loads.
As a cost-effective alternative, you could invest in an index fund, which is a mutual fund that holds stock in one market index. This financial investment has lower management fees than actively managed funds.
When to Invest: Mutual funds are best for retirement and other long-term investments. They also offer convenient stock market access for investors without the complications of having to research, buy and manage individual stocks in a portfolio. Many people first invest in mutual funds when they start contributing to a 401(k) at a job.
How to Buy: Mutual funds can be purchased directly through the firms that manage them and discount brokerage firms. SmartAsset’s brokerage accountant comparison tool will help you find the best trading platform for your needs. Mutual funds typically require a minimum investment.
When you buy an option, you’re purchasing the right to buy or sell an asset at a fixed price. This contract lasts only for a specific timeframe. Investors can pick between two types of options: call options (which is the right to buy assets) and put options (which is the right to sell options).
Options, simply put, are another way to buy stock. And like all stock investments, options come with the risk of losing value. This means that if the stock falls from its initial price, you will lose money.
As an example, if the premium for an option is $6 for 100 shares, then it will add up to $600. And if a purchaser has a call option with a strike price at $85, and sells the stock at a higher trade value of $100 on or before the maturity date, then the investor will be up $15. Multiplying this by 100 shares, you will have $1,500, from which the initial investment of $600 must be deducted. This will leave you with $900, excluding commission and fees. But if the stock value falls beneath $85, it could expire worthless.
When to Invest: Like other financial investments, stock options could generate big gains and big losses. Investors generally buy stock options when they believe that they are underpriced. Other investors buy put options to hedge stock that they already own as a protection against a possible fall in pricing. This protection, however, expires with the maturity date of the put.
How to Buy: You can buy stock options through an online brokerage. SmartAsset’s brokerage accountant comparison tool will help you find the best trading platform for your needs.
Financial investments in real estate are no longer limited to buying and selling property, or collecting rent. Investors can now take a hands-off approach by investing in real estate investment trusts (REITS), which are companies that own properties that generate income; and real estate crowdfunding platforms, which pool money from investors into real estate projects.
When to Invest: Real estate investment could be a good opportunity if you want to take on more risk for higher returns. But like with other financial investments, you should only put your money in if you are able to hold the investment for a long time horizon and you fully understand the terms.
How to Buy: You can buy REIT shares, REIT mutual funds and REIT ETFs through an online brokerage. SmartAsset’s brokerage accountant comparison tool will help you find the best trading platform for your needs. You can also use robo-advisors and online marketplaces to invest in other real estate project portfolios.
Retirement plans allow you to buy stock, bonds and funds in two tax-advantaged ways. The first type lets you invest with pretax dollars, the second allows you to withdraw money without paying taxes.
Workplace retirement plans include 401(k)s and 403(b)s. Workers without access to these plans could finance retirement with an individual retirement plan (IRA) or a Roth IRA.
Risks for these financial investments are the same as if you were buying stocks, bonds and funds outside of a retirement plan.
When to Invest: It is never too early to invest in your retirement. Roughly one-third (34%) of Americans are leaving free money on the table, saving below the employee match offered by their employer.
As an example, a 35-year-old who puts away $900 a month into a 401(k) or IRA with a balance of $51,000 could save close to $1.9 million by age 65 (this estimate assumes an 8% annual return).
How to Open: While employers offer 401(k)s and 403(b)s, you can open an IRA, Roth IRA and solo 401(k) at a retirement account provider, bank and other financial institutions.
Simply put, individual stocks are shares of a company that you can buy. This makes you a partial owner, and as the company grows, so does the value of your stock.
These financial investments can offer you bigger returns when compared with others. However, your money will also be exposed to higher stock market risks. A financial advisor could recommend selling or liquidating your stock if it falls 10%.
Investors looking for more stability might want to buy dividend stocks, which pay out a percentage of company profits to shareholders.
When to Invest: Stocks are great assets to diversify your portfolio when you are prepared to take on additional risk. With every financial investment, timing is important for buying and selling stocks. The best times to buy are when a stock goes on sale, it is undervalued and when you invest long-term – Goldman Sachs says U.S. stocks averaged 10-year returns of 9.2% over the past 140 years.
How to Buy: The easiest way to buy stocks is through a financial advisor or an online broker. SmartAsset’s brokerage accountant comparison tool will help you find the best trading platform for your needs. And this step-by-step guide will breakdown instructions for you to buy stock.
Bottom Line
There are many smart financial investments to make your money grow. Depending on your financial goals, how much money you could invest and how long you can hold an investment, you will have to consider different levels of risk and returns when combining assets into your portfolio. Accounts like 401(k) plans and 529 plans are also great tools to save up for future investments in retirement and education.
Tips for Picking the Best Investment
- A financial advisor can help you pick the best financial investments for your goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When investments pay off, you will need to figure out how much you owe in taxes. SmartAsset’s capital gains tax calculator will help you estimate how you will be taxed in your location.
- If you don’t have a lot of money to invest, you might also consider a robo-advisor online, which offers lower fees and account minimums than traditional financial advisors.
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