Investing intimidates a lot of people. There are a lot of options, and it can be hard to figure out which investments are right for your portfolio. This guide walks you through 10 of the most common types of investment and explains why you may want to consider including them in your portfolio. If you’re serious about investing, it might make sense to find a financial advisor to guide you. SmartAsset can help you find the right advisor for you with our free financial advisor matching service.
Stocks may be the most well-known and simple type of investment. When you buy stock, you’re buying an ownership share in a publicly traded company. Many of the biggest companies in the country — think General Motors, Apple and Facebook — are publicly traded, meaning you can buy stock in them.
When you buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money.
Brokers sell stocks to investors. You can either opt for an online brokerage firm or work face-to-face with a broker.
When you buy a bond, you’re essentially lending money to an entity. Generally, this is a business or a government entity. Companies issue corporate bonds, whereas local governments issue municipal bonds. The U.S. Treasury issues treasury bonds.
After the bond matures — that is, you’ve held it for a predetermined amount of time — you earn back the principal you spent on the bond, plus a determined rate of interest.
The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be lower risk. There is some risk involved, of course. The company you buy a bond from could fold, or the government could default. Treasury bonds especially, however, are considered a very safe investment.
A mutual fund is a pool of many investors’ money that is invested broadly in a number of companies. Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks companies and other instruments in which to put investors’ money. Fund managers try to beat the market by choosing investments that will increase in value. A passively managed fund simply tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500. Some mutual funds invest only in stocks, others only in bonds and some in a mixture of the two.
Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in. The risk is lesser, though, because the investments are inherently diversified.
Exchange-traded funds (ETFs) are similar to mutual funds in that they are a collection of investments that tracks a market index. Unlike mutual funds, which are purchased through a fund company, ETFs are bought and sold on the stock markets. Their price fluctuates throughout the trading day, whereas mutual funds’ value is simply the net value of your investments.
ETFs are often recommended to new investors because they’re more diversified than individual stocks. You can further minimize risk by choosing an ETF that tracks a broad index.
Certificates of Deposit
A certificate of deposit (CD) is a very low-risk investment. You give a bank a certain amount of money for a predetermined amount of time. When that time period is over, you get your principal back, plus a predetermined amount of interest. The longer the loan period, the higher your interest rate.
There are no major risks to CDs. They are FDIC-insured up to $250,000, which would cover your money even if your bank were to collapse. That said, you have to make sure you won’t need the money during the term of the CD, as there are major penalties for early withdrawals.
There are a number of types of retirement plans. Workplace retirement plans, sponsored by your employer, include 401(k) plans and 403(b) plans. If you don’t have access to a retirement plan, you could get an individual retirement plan (IRA), of either the traditional or Roth variety.
Retirement plans aren’t a separate category of investment, per se, but a vehicle for making investments, including purchasing stocks, bonds and funds. The biggest advantage for retirement plans — other than Roth IRA plans — is that you put in pre-tax dollars. You won’t pay taxes on the money until you withdraw it in retirement, when you will presumably be in a lower tax bracket. The risks for the investments are the same as if you were buying the investments outside of a retirement plan.
An option is a somewhat more complicated way to buy a stock. When you buy an option, you’re purchasing the ability to buy or sell an asset at a certain price at a given time. There are two types of options: call options, for buying assets, and put options, for selling options.
The risk of an option is that the stock will decrease in value. If the stock decreases from its initial price, you lose your money. Options are a highly advanced investing technique, and you must get approval to participate in the options market.
Many people use annuities as part of their retirement savings plan. When you buy an annuity, you purchase a contract with an insurance company and, in return, you get periodic payments. The payments may begin right away or at a specified future date. They may last until death or only for a predetermined period of time.
While annuities are fairly low risk, they aren’t high-growth. They make a good supplement to retirement savings, rather than an integral source of funding.
Cryptocurrencies are a fairly new investment option. Bitcoin is the most famous cryptocurrency, but there are countless others. Cryptocurrencies are digital currencies that don’t have any government backing. You can buy and sell them on cryptocurrency exchanges. Some retailers will even let you make purchases with them.
Cryptos often have wild fluctuations, making them a very risky investment.
Commodities are physical products you can buy. They could be agricultural products like wheat, barley and corn, or energy products like oil, coal or solar power. Precious metals like gold and silver are some of the most common commodities.
Commodities investing runs the risk that the price of the product will go down quickly. For instance, political actions can greatly change the value of something like oil, while weather can impact the value of agricultural products.
The Bottom Line
There are a lot of types of investment to choose from. Some are perfect for beginners, while others require more experience. Each type of investment offers a different level of risk and reward. Investors should consider each type of investment before determining an asset allocation that aligns with their goals.
- A financial advisor helps you put together an investing plan that will utilize a number of the above types of investments. SmartAsset’s free financial advisor matching service makes it easy to find an advisor who suits you. Once you answer a few questions, we’ll match you with up to three advisors in your area. We fully vet our advisors, and they are free of disclosures. Before deciding how you want to proceed, you can talk to each of your advisor matches.
- If your investments pay off, you may owe the capital gains tax. Figure out how much you’ll pay when you sell your stocks with our capital gains tax calculator.
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