Types of Investments
There are many different types of investments including stocks, bonds, real estate, etc. This information does not do you much good unless you know something about them. Let’s take a look at some basic definitions to give a bit more understanding. Stocks are tiny pieces of a company that anyone can buy. Stocks are volatile, s0 while you could make a lot of money you could also lose a lot of money. When you pick individual stocks you lack diversification. Stocks can be invested through a broker or automated investing platform. We will learn more about this in another post. Stocks are often a large part of managed portfolios. Bonds are a loan (kind of like an IOU) with interest. They are often issued by governments. U.S. Savings Bonds are an example of this. Interest rates of bonds are usually higher than the interest rate of banks. However, you do assume more risk than a standard savings account. You have all your eggs in one basket if you only invest in bonds.They can be purchased directly through the government, a brokerage, or trading platform. They are often included in managed portfolios too.
Exchange traded funds (ETFs) are a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stocks. Most ETFs are index funds, that is, they hold the same securities in the same proportions as a certain stock market index or bond market index. The most popular ETFs in the U.S. replicate the S&P 500 Index, the total market index, and the NASDAQ-100 index. A Mutual Fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities.
Real Estate involves purchasing property such as apartments or houses. There can be a high barrier to entry because property is expensive. Real Estate Trusts allow you to invest in a very small piece of property. Real Estate can be invested directly from a property owner. Real Estate Investment Trusts can be purchased through a broker. Managed portfolios often contain some real estate. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time. While a traditional mortgage generally requires a 20% to 25% down payment, in some cases a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Buying and owning real estate is an investment that can be both satisfying and lucrative. Commodities are an important aspect of most Americans’ daily lives. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Traditional examples of commodities include grains, gold, beef, oil, and natural gas. For investors, commodities can be an important way to diversify their portfolio beyond traditional securities. Because the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility. In the past, commodities trading required significant amounts of time, money, and expertise, and was primarily limited to professional traders. Today, there are more options for participating in the commodity markets. Now that you know a little more about the different investments, which one will you choose and whom will you choose to assist you? Are you ready to begin investing? All the best.
Click here to buy a copy of my ebook: Money Management 101
All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed an investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as a recommendation or as a guarantee of any specific outcome or profit.