Investing 101: Types of Investments

Picking the right investment can be both exciting and daunting as well. There are numerous options, and it can be hard to figure out which investments are right for your portfolio. This guide walks you through 5 of the most common types of investment and explains why you may want to consider including them in your portfolio.

Stocks

Stocks, also known as shares or equities, maybe 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.

Stock prices can go up or down. Thus making them risky. You can buy stocks via a broker.

Bonds

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 lender gets interest payments. The lender gets principal back after the bond matures. This is of course provided lender has held the bond for the contractual time period.

Bonds that to be lower-risk investments than stocks.

Mutual Funds Investments

A mutual fund is a pool of many investors’ money that is invested broadly in a number of companies. There are 2 types of mutual funds, 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.

Since the investments in a fund are diversified, the risks are often lower than stocks.

Exchange-Traded Funds Investments

Exchange-traded funds (ETFs) are similar to mutual funds in that they are a collection of investments that tracks a market index. Shares of ETFs are bought and sold on the stock markets which is different from mutual funds. ETF prices fluctuate throughout the trading day.  Unlike mutual funds’ value which is simply the net asset value of your investments calculated at the end of each trading session.

Cryptocurrencies

Cryptocurrencies are a fairly new investment option. Bitcoin is the most famous cryptocurrency, but there are countless others, such as Litecoin and Ethereum. 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.

Many more types of Investments

In conclusion, there are still a lot more 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.