When you starting to invest, you take steps towards using money to earn money. You’ll take cash and buy different types of investments, or securities. There are many different securities you can invest in, and the ones you choose can depend on what type of investor you are. Once you take your personal circumstances and risk tolerance into account, you may able to select the securities that best fit your portfolio.
Securities at a Glance
There are multiple types of securities, but most fall under two categories: Equities and debts. Equities are shares in a corporation, commonly known as stocks. Debts are loans, or bonds, issued to companies or governments.
A third type of securities, derivatives, can be based on stocks or bonds, but also include futures contracts. Those contracts, including commodities futures, allow investors to bet for or against the price of a particular asset. However, derivatives contain far more risk than either stocks or bonds and may be a poor choice for a new investor.
Securities are traded through stock markets and secondary markets, though bonds are usually restricted to the latter. The Securities and Exchange Commission oversees sales and trades of securities with the help of Self-Regulatory Organizations (SROs). Those groups include he National Association of Securities Dealers (NASD) and the Financial Industry Regulatory Authority (FINRA).
There are more complex securities like convertible bonds, which can be converted into company stock. There are also different classes of securities, including certificated securities (literally on paper), bearer securities (which are negotiable), and registered securities (which bear the name of the holder).
However, the securities listed below represent the most common securities in investor portfolios. They’re also some of the most accessible securities for new investors.
Stocks give you, the shareholder, a portion (or share) of ownership in a company. When a stock price rises, your earnings also rise. The more shares you own, the more money you’ll earn. Similarly, if a stock price falls, you’ll lose more money. Stocks are risky compared to other securities. If you’re young, investing in stocks for the long-term is a good idea. But if you’re older and closer to retirement, you might consider something less risky, like bonds.
You can buy individual stocks through a brokerage or direct stock plans. You can also buy stocks through stock funds, which is a type of mutual fund that focuses on stocks.
Bonds are debt securities. When you buy a bond, you’re lending money to a company, government entity, or municipality. The lender promises to pay you back by a certain time along with a specified rate of interest. Once the bond matures, it becomes due.
There are many different types of bonds, including:
- Corporate bonds
- Investment-grade bonds
- Municipal bonds
- U.S. Treasury bonds
Bonds can bring in steady income. They pay interest twice a year that’s usuallyally exempt from federal income tax. But they still carry risk. If the bond issuer doesn’t stay up-to-date on interest or principal payments, they could default on their bonds. If bonds are sold before their maturity, they could be worth less than the face value.
3. Mutual funds
Mutual funds consist of many different types of securities, including stocks and bonds. It pools the money of many different investors and the combined funds make up shares in a portfolio. Each share is part of your ownership in the fund.
There are a few different types of mutual funds, like:
- Money market funds
- Bond funds
- Stock funds
- Target-date funds
Mutual funds offer instant diversification. Since your money can go towards many different types of securities at once, you won’t feel too much of a hit if you experience a loss in one security
4. Exchange-Traded Funds (ETFs)
ETFs are like mutual funds in that investors pool their money into a fund made up of many different securities, like stocks, bonds and other assets. However, they also include mutual funds. They tend to cost less than mutual funds since they’re low-cost index funds and are usually passively managed.
ETFs are traded through the stock market like stocks, and you can buy and sell them throughout the day.
An annuity is a financial contract you have with an insurance company to pay you at a specified date. Sometimes it’s immediately; sometimes it’s in the future. You can buy an annuity either with one payment in full or many payments, depending on the agreement.
Annuities allow retirees to receive a fixed income after theyve stopped working and earning money. You can receive payments for a set amount of time, even up until you die. After that, your beneficiary can receive payment as well.
There are a handful of different annuities, including:
While it’s a good idea to secure some funding in retirement, annuities can have some drawbacks. You could die before collecting all the money you’re owed. Meanwhile, some annuities don’t pay beneficiaries after your death.
6. Retirement accounts
Retirement accounts, like Individual Retirement Accounts (IRAs), and 401(k)s, offer some variation of mutual funds, stocks, and variable annuities. Some offer brokerage accounts, so you can invest in stocks, bonds and other assets.
The type of retirement account you choose depends on your job. 401(k)s are work-sponsored retirement accounts where you can contribute a portion of your earnings to your account. Sometimes, your company will offer to match those contributions up to a certain percentage.
IRAs come in a few different forms, like traditional IRAs and Roth IRAs. Both are helpful options if you don’t have a work-sponsored 401(k) plan. They offer diffent tax incentives, and your income could determine which option is best for you.
7. Education plans
Education investments can include 529 savings plans or custodial accounts. However, 529 prepaid tuition accounts don’t have investment options.
For 529 savings plans, you can invest in either mutual funds or ETFs. Earnings grow tax-deferred and withdrawals are tax-free as long as they are used for qualifying education expenses, whether it’s for K-12 school or college-related costs.
Uniform Gift to Minors Act (UGMA) custodial accounts allow you to invest in many different types of securities, including stocks, bonds, mutual funds, annuities and insurance policies. Parents can open up an account on behalf of their child and transfer ownership once the child reaches 18 or 21, depending on the laws of the state the plan is in.
The Uniform Transfers to Minors Act (UTMA) account is another type of custodial account. It allows investments into other types of assets, including real estate and intellectual property.
You have a few different ways to invest in securities. It all depends on the options that best fit your finances and lifestyle.
Before you take the plunge into investing in securities, review each one first. While some might not be a good fit, diversifying your portfolio is a great way to make sure you don’t lose a lot of money at once.
Tips for Investing
- Navigating the securities landscape might not be as easy as you thought. It may help to talk with an expert who can help you weave through the system. Chatting with a financial advisor is a good way to gain an understanding of that system. You can use the SmartAsset financial planner matching tool to find an expert near you.
- There are other ways to invest — not only securities. If you’re looking to minimize your risk as much as possible, you can explore high-interest savings accounts, CDs, or regular savings accounts. Your earnings might be much less compared to securities, but you also get to keep all your money.
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