Types Of Investments
There are many different types of investments in the financial world. Most people are only familiar with the most basic: a bank savings account. While a bank savings account maybe the most familiar investment it is also one of the worst. If you want near 100% safety, like a savings account, and also want more interest you should put your money into a Money Market. Indeed, many people would never touch a bank savings account if they where familiar with various other opportunities. This article is aimed at those that wish to have a basic idea of what type of investments are available.
What are the different types of investments? Here is a small list of what is available and a basic description.
Stocks A stock is a small percentage of a corporation. When you purchase a stock you are essentially buying a piece of said corporation’s future earnings. Generally, but not always, when a corporation earnings rise the price of a stock will rise with it. Please note that the price of a stock is decided by the marketplace. This means that the current price is completely dependent on if a buyer is willing to buy and a seller is willing to sell at an agreed upon price. Stocks in general can be very risky. When purchasing only shares of one company you are completely exposed to how well that company fairs. When purchasing international stocks you also have geopolitical and currency risks too worry about. I do not recommend purchasing individual stocks. Instead you should purchase an index as part of a predefined allocation.
Bonds In the simplest terms a bond is an IOU. A corporation or government will sell bonds and agree to pay them back, over a certain amount of time, at a certain interest rate. The amount of time and interest rate is completely up to the issuing party. In general bonds are thought of as a safe investment. However, a few risks do exist. A bond issuer could always default which means that they simply can not pay back their obligation. A change in interest rate is another risk of bonds. If you purchase a bond today that pays 5%, and within a month interest rates jump to 10%, who would want to purchase your bond? In this instance the going rate of your bond would be about half the amount it was a month ago. I do not recommend purchasing individual bonds. Instead you should purchase a mutual fund or ETF that tracks a bond index.
Mutual Fund Mutual funds are a pooling of investors money that is managed by a financial institution. A mutual fund manager can invest the funds assets in just about any financial instrument. The fund will have a prospectus that details where the fund is invested and its expenses. Some funds attempt to follow an index while other funds are actively managed and can invest in anything the manager wishes.
Exchange Traded Fund ( ETF ) An ETF is very similar to a mutual fund except it trades like a stock. It is a portfolio of stocks, bonds, or both that trades under a ticker like a stock. Today most ETF’s attempt to track an index and are exceptionally cheap. An example of an ETF would be SPY which tracks the S&P 500.
Many other different types of investments exist but in general you should stay away. The investment types listed here will allow you to build a respectable portfolio. If you think must invest in options, forex, futures, ext please do your homework. These use extreme leverage and you can easily lose everything.