Investments can intimidate a lot of people because there are many 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 investments, from stocks to crypto, and explains why you may want to consider including each in your portfolio. If you’re serious about investing, it might make sense to find a financial advisor to guide you and help you figure out which investments can help you to meet your financial goals.
Stocks, also known as shares or equities, might be the most well-known and simple type of investment. When you buy stock, you’re buying an ownership stake 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.
How you can make money: 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.
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, notes and bills, all of which are debt instruments that investors buy.
How you can make money: While the money is being lent, the lender gets interest payments. After the bond matures — that is, you’ve held it for the contractually determined amount of time — you get your principal back.
The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be a lower risk. There is still some risk involved, of course. The company you buy a bond from could fold, or the government could default. Treasury bonds, notes and bills, however, are considered very safe investments.
3. Mutual Funds
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 securities in which to put investors’ money. Fund managers often try to beat a designated market index by choosing investments that will outperform such an index. A passively managed fund, also known as an index fund, simply tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500. Mutual funds can invest in a broad array of securities: equities, bonds, commodities, currencies and derivatives.
Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in. The risk is often lesser, though, because the investments are inherently diversified.
How you can make money: Investors make money off mutual funds when the value of stocks, bonds and other bundled securities that the fund invests in go up. You can buy them directly through the managing firm and discount brokerages. But note there is typically a minimum investment and you’ll pay an annual fee.
4. Exchange-Traded Funds (ETFs)
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, shares of ETFs are bought and sold on the stock markets. Their price fluctuates throughout the trading day, whereas mutual funds’ value is simply the net asset value of your investments, which is calculated at the end of each trading session.
How you can make money: 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. And just like mutual funds, you can make money from an ETF by selling it as it gains value.
5. Certificates of Deposit (CDs)
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.
How you can make money: CDs are good long-term investments for saving money. There are no major risks because 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.
6. Retirement Plans
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.
How you can make money: Retirement plans aren’t a separate category of investment, per se, but a vehicle to buy stocks, bonds, and funds in two tax-advantaged ways. The first, lets you invest pretax dollars (as with a traditional IRA). The second, allows you to withdraw money without paying taxes on that money. 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 complex 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.
How you can make money: As an investor, you lock in the price of a stock with the hope that it will go up in value. However, the risk of an option is that the stock could also lose money. So if the stock decreases from its initial price, you lose the money of the contract. Options are an advanced investing technique, and retail should exercise caution before using them.
Many people use annuities as part of their retirement savings plan. When you buy an annuity, you purchase an insurance policy and, in return, you get periodic payments.
Annuities come in numerous varieties. They may last until death or only for a predetermined period of time. The may require periodic premium payments or just one up-front payment. They may link partially to the stock market or they may simply be an insurance policy with no direct link to the markets. Payments may be immediate or deferred to a specified date. They may be fixed or variable.
How you can make money: Annuities can guarantee an additional stream of income for retirement. But while they are fairly low risk, they aren’t high-growth. So investors tend to make them a good supplement for their 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, such as Litecoin and Ethereum. These 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.
How you can make money: Cryptos often have wild fluctuations, making them a very risky investment. However, some investors use them as alternative investments to diversify their portfolios beyond stocks and bonds. You can get them at cryptocurrency exchanges.
Commodities are physical products that you can invest in. They are common in futures markets where producers and commercial buyers – in other words, professionals – seek to hedge their financial stake in the commodities.
Retail investors should make sure they thoroughly understand futures before investing in them. Partly, that’s because commodities investing runs the risk that the price of a commodity will move sharply and abruptly in either direction due to sudden events. For instance, political actions can greatly change the value of something like oil, while weather can impact the value of agricultural products.
Here’s a breakdown of the four main types of commodities:
- Metals: precious metals (gold and silver) and industrial metals (copper)
- Agricultural: Wheat, corn and soybeans
- Livestock: Pork bellies and feeder cattle
- Energy: Crude oil, petroleum products and natural gas
How you can make money: Investors sometimes buy commodities as a hedge for their portfolios during inflation. You can buy commodities indirectly through stocks and mutual funds, or ETFs and futures contracts.
How to Buy Different Types of Investments
There are two main ways for you to purchase the different types of investments you may be interested in buying. Each is easy to do, but only one of the two provides a service that is completely done for you. The two ways to buy the types of investments you want are:
- Start an online brokerage account: You can elect to manage your own investments and just open a brokerage account. This enables you to get up and running quickly with the ability to buy stock, bonds, mutual funds, and more in a matter of minutes. The only downside is that you’ll be making the final financial decisions all on your own.
- Hire a financial advisor: The other way to buy multiple types of investments is to hire a financial advisor. The advisor can not only provide you with access to buy and trade assets but they can also help you figure out an overall financial strategy and prepare you adequately for retirement. This is more of an automated process that you just have to approve trades or investments, and the advisor takes care of the details.
There are a lot of different types of investment to choose from. Some are perfect for beginners, while others require more experience and research. Each type of investment offers a different level of risk and reward, giving you a good option or two no matter what your goal might be. Investors should consider each type of investment before determining an asset allocation that aligns with their overall financial goals.
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