10 types of investments
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Most people know they have to invest if they want their money to outrun inflation over the long term. But it’s easy to get overwhelmed by the sheer volume of investment information available, from 24-hour financial news broadcasts to endless articles on the Internet. To cut through all the noise, it helps to think of investments as having one of three types: growth, income, or growth and income. While there is no one best type of investment for every investor, your own personal financial goals and risk tolerance will guide you to what is best for you in one of these three main classifications. Of course, there are countless specific investment types within these broad categories. But if you limit your search to these top 10 types of investments, it can save you from getting overwhelmed.
When people think of long-term investments, stocks are usually at the top of the list. A share of stock represents ownership of a company. Most well-known companies, from Amazon and Apple to Tesla and Coca-Cola, are publicly traded, meaning you can buy or sell shares of their stock on the stock exchange. Although supply and demand are what make a stock’s price fluctuate from minute to minute, it is the financial success of the underlying company that is one of the main drivers of the price. share price. For example, when a company sees booming sales and profits, investors tend to flock to the market and push a stock’s stock higher. But if earnings fall short of expectations and a company shows a bleak outlook, investors tend to sell their stocks and move on to other investments. That’s why it’s important to choose stocks that have good long-term prospects ahead of them.
Bonds are income-generating investments that are generally more conservative than stocks, which partly explains why their expected return is generally lower. A bond is essentially a loan agreement in which investors provide companies with money in exchange for the promise of ongoing interest payments and repayment of their principal at a specified future date. In a perfect world, this would make bonds extremely low risk, and indeed this may be the case. However, bonds are not without risk. If an issuer is in financial difficulty, they may not be able to make payments. This is why many bonds are rated by outside agencies, to help investors assess the financial risk of a bond issuer. But bonds also carry interest rate risk due to the fact that bond prices fall when interest rates rise, and vice versa.
Savings accounts are among the most prudent investments. They do not offer any opportunity for capital appreciation, but rather provide capital protection. Savings accounts are FDIC insured up to $500,000, and many banks and brokerages also offer additional insurance up to that amount. As a result, savings accounts generally have low returns. For example, as of September 8, 2022, the national average interest rate on savings was only 0.13% per annum. To maximize returns from a savings account, consider choosing an account at an online bank. With low overhead, these types of banks were offering closer to 2% on the same date. Although savings accounts are generally not suitable for long-term investment goals, they can be great choices for short-term savings, like your emergency fund.
Certificates of deposit
A certificate of deposit is a kind of hybrid between a savings account and a bond. Certificates of deposit have fixed interest rates and maturity dates, like bonds, but they’re also covered by the same FDIC insurance as savings accounts. Generally speaking, CDs pay slightly higher interest rates than savings accounts. However, they also usually have early withdrawal penalties, meaning you shouldn’t invest unless you want and can tie up your money for a while. CDs typically have maturity dates between three months and 10 years, so they offer some flexibility. Many investors will ladder their CD investments over several different maturities using a strategy known as laddering. For example, an investor can spread a total investment of $10,000 across 10 different CDs, with maturities ranging from 1 year to 10 years. As the CDs mature, the money can be used or reinvested at the end of the scale.
Mutual funds date back to 1924 and have long been a preferred investment option for the general public. Under the direction of professional managers, mutual funds pool investors’ money and invest it according to written guidelines. Generally speaking, the objective of a mutual fund is to outperform an index that it tracks. For example, a growth mutual fund might aim to beat the performance of the S&P 500 Index. Since mutual funds are generally actively managed, their ongoing costs can be high. However, the performance of the fund may outweigh the cost of additional fees. One of the disadvantages of traditional mutual funds is that they can only be bought or sold once a day, at the close of the trading day.
exchange traded funds
Exchange-traded funds are more of a modern version of traditional mutual funds. Exchange-traded funds typically hold a portfolio of securities, but trade on an exchange as a single investment, like a stock. Unlike a traditional mutual fund, an ETF can be bought and sold on a stock exchange any time the market is open. Exchange-traded funds often have specialized portfolios that track either a specific market index or a specific market sector, such as the S&P 500 Index or technology stocks. They generally have low annual expenses and can be bought or sold commission-free, depending on the broker you use.
Commodities are physical products like oil, orange juice, pork belly, and gold. An investment in commodities is often considered a hedge against inflation, as the prices of these items rise in line with general cost increases. However, commodity trading is dominated by professional traders and institutions, and it can be difficult for general retail investors to participate directly. Commodities can also be extremely volatile, as unexpected events like bad weather, supply chain issues, or geopolitical issues can significantly affect the prices of individual commodities. Some mutual funds and ETFs allow retail investors easier access to commodities.
Annuities are insurance contracts that provide payments to investors on a regular basis. The main reason for owning an annuity is to create an income stream that you cannot survive. Unlike bonds, which repay on a specified maturity date, annuities generally continue payments for the rest of your life.
There are two main types of annuities: fixed and variable. Fixed annuities convert an initial premium into regular income payments, usually at a fixed interest rate. Variable annuities typically have a growth component during an accumulation phase, then convert to income-producing investments during the distribution phase.
The main disadvantages of annuities are their fees and the government penalties that apply to withdrawals before age 59.5. Before investing in an annuity, be sure to speak with your financial and tax advisors.
At the most basic level, an option is a financial instrument that gives you the right to buy or sell a stock at a specific price on a future date. There are many varieties of options, and professional traders typically use them in a combination of hedging and speculative strategies. Although options offer immense potential for gain, they also carry the risk of losing 100% of your investment.
For example, let’s say you invest $500 in a call option, which gives you the right to buy a stock at $100 a share over the next three months. If that action never exceeds the specified price, known as the strike price, your option will expire worthless. However, if the stock significantly exceeds $100, your investment could double or triple, or even more.
Although some more conservative strategies are available using options, they are generally considered speculative investments suitable only for experienced investors.
Cryptocurrency is the newest asset class on this list, and it is by far the most speculative. In fact, many high-profile investors don’t even consider cryptocurrency an “asset,” but more of a speculative fantasy. Of course, on the other side of the coin are many well-known investment professionals who make big bets on cryptocurrency. So what exactly is it, and does it deserve a place in your portfolio?
Cryptocurrency in general is a digital currency whose transactions are recorded on a decentralized and encrypted blockchain. The theory behind crypto is that it offers privacy and reliability beyond current fiat currency systems run by governments around the world.
However, for now, cryptocurrency remains a highly speculative investment. Even Bitcoin, the largest and most well-known cryptocurrency, is down over 58% since September 8, 2022. The bottom line is that while cryptocurrency can give your wallet a bounce at some point given, the speculative nature of the asset class means you need to limit your exposure.
Although investing may seem overwhelming at first glance, if you take the time to understand the main types of investments, you’ll likely find some that match your investment goals and risk tolerance. For some investors, working with a financial advisor is the best way to start, while others prefer to open their own accounts with online brokers and learn from experience. Either way, be sure to manage your risks and understand what you’re investing in so you can set yourself up for long-term success.
Information is accurate as of September 8, 2022.
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