Whether you’re a young person just starting to save or an older individual looking to supplement their retirement income, there are many types of investments that it can be difficult to know where to start. This guide explains some common ones where you can begin to make your first investment.
8 types of investments
- Stocks and equity
- Bonds and fixed income
- Mutual funds
- Exchange-traded funds
- Cash and cash equivalents
- Real estate
- Gold and other precious metals
1. Stocks and equity
A stock is a share of ownership in a company. When you buy a stock, you buy shares from the company and become an owner—you own part of the company!
Unlike with bonds and other fixed-income securities, when you invest in stocks, your investment can increase or decrease in value depending on how well the company does. The value of a stock is called its price per share (or just “stock price”). If you owned 1 million shares at $150 per share, then your total holding would be worth $150 million dollars even if no new investors were buying or selling shares. That’s why stocks are also called “equity”.
Learn more about how to invest in stocks.
2. Bonds and fixed income
Bonds are loans to governments and corporations. The borrower pays interest (the coupon) to the lender on a regular basis, typically every six months or annually. Bonds have a fixed interest rate and maturity date. For example, if you buy a bond with a 10-year maturity at 4%, it will pay 4% interest until the bond matures in 10 years.
Bonds are good for investors who want steady returns over long periods of time; they’re also good for diversifying portfolios because their value doesn’t fluctuate as much as stocks do. When thinking about investing in bonds, keep in mind that longer-term ones are typically riskier than short-term ones because there’s more time for interest rates to change.
Learn more about how to invest in bonds.
3. Mutual funds
Mutual funds are a type of investment where a professional investment manager pools money from many investors and invests it in stocks, bonds, cash or other assets. They can be used to invest in stocks, bonds and other securities by pooling the money together and buying those assets directly.
Mutual funds provide several advantages over direct investing:
- You have access to professional investment management at low cost
- You can avoid the time-consuming task of determining what to buy (and when)
- You get instant diversification
Here’s how to invest in mutual funds.
4. Exchange-traded funds
Exchange-traded funds (ETFs) are essentially mutual funds that can be traded like stocks. They have lower fees, greater liquidity and transparency than the traditional approach of buying a basket of stocks or bonds individually.
Like mutual funds, ETFs pool money from multiple investors to invest in securities such as stocks or bonds. The price of an ETF changes throughout the day depending on how many shares are being bought and sold by other traders. This allows you to make quick decisions about buying or selling your holdings without talking to a human broker.
However, this also means that there’s risk involved because you could suffer losses if there’s no one else willing to buy your shares at their current price and you can end up selling for less.
Learn more about ETFs.
5. Cash and cash equivalents
Cash and cash equivalents are the most common form of investment. In general, you can put your savings into a savings account, money market fund, or certificate of deposit (CD). These are considered safe investments because they won’t lose value as dramatically as stocks might.
The downside is that they almost never earn enough to make your money grow at a rate that is worth the time you spend on it. But there’s good news: Even though these types of investments aren’t likely to boost your wealth quickly or dramatically (unless an unexpected stock market boom happens), they’re also unlikely to lose their value like stocks do over short periods of time (although this may vary depending on which financial institution holds them).
6. Real estate
Real estate is also an investment that many people make. It can be a good way to build wealth. Investors who don’t feel comfortable with the stock market (or who just want something tangible) can invest in real estate to diversify and add stability to their portfolio.
This doesn’t mean that you should avoid stocks altogether. Stocks are still one of the best ways for investors with long-term goals such as retirement savings plans. However, that is not our focus today, let’s move on to other types of investments.
Commodities are raw materials that are used to make other products. There are many types of commodities such as gold, oil, and corn.
Commodities are usually bought and sold on futures markets. The price of a commodity is determined by supply and demand—the more people who want it, the stronger its price becomes. A weak economy also affects the value of a commodity as fewer people can afford them during an economic downturn.
Because they’re so volatile in nature, investing in commodities can be risky for some investors (especially beginners). They’re also very illiquid investments—you have to wait for delivery when buying your stock—which means you have less control over when you sell off your shares or contracts than with other investments like mutual funds or stocks where you may be able to trade them at any time during market hours.
8. Gold and other precious metals
In addition to the above, gold is also a good type of investment. It is not controlled by a country or government. This means that if you’re worried about your money being affected by inflation in the future, then you might want to consider investing in gold and other precious metals as well.
There are a variety of different ways to invest money, each with its benefits and drawbacks. Take note:
- You should have a plan.
- You should ensure to invest in robust financial knowledge or consult with a financial advisor before investing.
- The best time to invest is when you’re young.
With so many different types of investments available, the key is finding out which ones work best for you. Depending on your financial situation and risk tolerance level, some may be more suited to your needs than others. If you’re looking to start investing money today, consider taking our risk tolerance test and then take a look at our top list of investments to get you started.