So you have some extra money, and you are ready to invest it. But now you are wondering how exactly to invest your money to make the best return possible. For many people, it may be a good idea to work with a financial professional. They can guide you in the right direction to make your money work for you.
One of the first steps to investing is understanding what type of investments exist. When you enter the game, it is best to do some research. Try to understand the different places you can put your money in. You need to understand what risks are involved and how long until you can expect to see a return. Doing this research is a good idea, even if you are going to work with a professional. It is best to have a basic understanding so that you can ask questions to clarify any misconceptions.
In this article, we discuss some of the many different types of investments. This basic overview can help you to understand where your money can go and how it can work for you.
Cash is the most basic type of investment. It is quite simple to understand and is the safest type of investment. The investor knows exactly how much their investment is worth and how much interest they can earn. Investing in cash also means that the investor is guaranteed to have their capital investment returned. Cash is invested when it is kept in savings accounts. This is how an investor can be confident of what their return is. A savings account has a posted interest rate. Some are higher than others. Some accounts also offer better interest rates for higher minimum balances. Keeping your money in a savings account is safe because the money cannot decrease in value unless you draw out on the account. Even if the interest rate decreases, you do not lose money that is already in the account.
While this may seem like a great idea, there are some downsides. Low risk and safety mean lower interest rates. This means your money does not earn the best returns. The return rate is generally not greater than inflation. So your money does not grow in value at the same rate that costs increase.
Certificates of deposit are a safe alternative to cash investments. They are highly liquid (meaning you can have access to the money quickly). Still, they are generally issued at a higher interest rate. The downside here is that the money is meant to be held for a specific amount of time without being withdrawn. If you choose to withdraw early, you are subject to penalty fees. This is negative because your investment obviously ends up not paying out what you planned.
When you think of investing your money, you are probably thinking about the stock market. Stocks are a simple type of investment and yet can be some of the most complex due to their changing value. It can also be tricky to know which stocks to actually buy initially and when to sell. This is one of the types of investments that can really use the guidance of a stockbroker or financial planner.
Buying a stock means you are purchasing an ownership stake in a company that is publicly traded. These are companies like Coca-Cola, Walmart, Toyota, and Visa. These are just a few examples of the types of companies you can buy shares in. There are hundreds of options, some more volatile than others.
The idea for buying a stock is that you purchase the share at a low price. Over time, the value of the stock goes up. At that point, you sell the stock, and the difference in value becomes your profit. Obviously, this does not always happen. That is its inherent risk of purchasing shares. The value of the stock may go down, meaning you lose your money.
A stockbroker’s job is to facilitate the sale of stocks to investors. Nowadays, it is possible to work with a broker online. If you prefer, though, many brokers work with clients face-to-face.
Stocks come with a second type of income. This income is paid out through dividends. When the trading company increases in value, they may choose to pay out dividends to their shareholders. There are two types of stockholders with dividend payouts. They are either common shareholders or preferred shareholders. Those who own common stock have voting rights when a company hosts a shareholders’ meeting. Those who own preferred stock are paid out dividends before common shareholders but do not have voting rights. Both types of stocks have their pros and cons. So do your research before you buy.
Bonds are an interesting type of investment. They are considered to be a safe way to invest your money because the eventual payout is likely. The safety of the investment means the interest rate or return is much lower than that of stocks. Like anything else, though, there could be some risk involved if the company you bought the bond from goes out of business. The same can be true even if the bond is issued from the government. Though the government is safe, they do have the right to default on the bond.
Bonds are typically issued by different levels of government and business. Municipal bonds are issued by local governments, whereas treasury bonds are granted by the U.S. Treasury. When a business issues a bond, it is called a corporate bond. Bonds are essentially a loan that you, as the investor, are providing to the company or government. The bond issuing entity uses the money to finance some factor of their organization.
Bonds are issued with a set interest rate and maturity date. When the bond matures, you are paid out the principal or initial amount you invested, plus the interest earned on the bond. The interest rate earned on a bond is usually set on typical interest rates at the time. Because of this, bonds are often traded when there is an overall increase in interest rates.
Have you ever heard about pooling your resources? In this type of strategy, each individual is stronger united than they are divided. This is the basic idea behind a mutual fund. A mutual fund is where many investors pool their money into one pot in order to broadly invest in a larger quantity of companies. This type of investment carries similar risks to that of stocks and bonds. This is because the mutual fund invests in stocks and bonds. The difference, though, is that because there is more buying power, the mutual fund purchases a diverse amount of securities. The diversity allows for changes in the value of some shares without severe consequences. Even if one stock goes down in value, there are other shares in the fund that can offset the dip.
Mutual funds are managed either passively or actively. When managed passively, the fund follows a major stock market. This type of management means the value of the fund mimics that index of the average of the market it is tracking. When a mutual fund is actively managed, there is a fund manager who picks and chooses which companies and securities to put the money in. They try to beat the market by choosing the securities that pay out the highest returns. Actively managed funds tend to have higher operating fees involved. Due to the work involved by the manager, there may be yearly management costs and up-front charges to get into the fund. Obviously, these costs cut into the investor’s returns. However, the investor is paying for the expertise of the individual, so hopefully, the gains outweigh the costs.
Exchange-traded funds (ETFs) first came into the investing scene in the mid-’90s. They are popular and recommended for new investors because they are easy to trade and are diverse. ETFs are similar to a passively managed mutual fund because they are made up of a group of investments that follow the index of the market. The difference is that ETFs are bought and sold on the stock exchange. Due to this, the value of an ETF can change drastically throughout the day, as their values typically fluctuate with the stock market.
Are you thinking about that day when you finally get to retire? Do you have big plans for how you are going to spend your time? That is great, but how are you going to finance it? This is where investing in your retirement plan comes into play. Retirement plans are not necessarily a different type of investment but are a way to make investments, such as stocks, bonds, and mutual funds. When you put your money into a retirement plan, you are investing your pre-tax money. Taxes are not charged on retirement plan money until you actually retire and draw down on the investment. At this time, you are likely going to be in a lower tax bracket, and therefore. you owe even less taxes on the money. The risk for retirement plans remains the same as any stock, mutual fund, or bond.
You are able to invest in a retirement plan through your workplace retirement plan. These may include 401(k)s and 403(b) plans. Some employers contribute to this fund on your behalf and then allow you to contribute as well. This is a highly recommended strategy because not only are you contributing to your own retirement, but someone else is doing it for you as well. Not all employers offer retirement plans. If this is the case with your employer, consider investing in an individual retirement plan. These are considered to be either traditional or Roth plans.
Options are similar to stocks but are definitely more complicated. Purchasing an option means you buy the ability to purchase or sell the asset only at a given time and only at a certain price. Options are expressed as with call or put. The call option means the buyer has the right, but not the obligation, to buy a bond, commodity, stock, or other assets at the specified price and before a specific expiration day. In this case, any of these securities is called the underlying asset. The profit here comes from the increased price of the underlying asset.
The put option is the opposite of the call. The put owner has the right to sell the underlying asset at a given time for a given price.
Like many other investments, there is a risk involved with options. This risk comes into play when the underlying asset decreases in value. Options are not for the faint of heart and not for the beginner investor. They are often tied to hedging funds. You also need approval to even be involved in the options market. Wait until you are more experienced in the investing game to even think about getting involved here. And unless you have a natural gift in the investment world, it is best to leave this to the professionals.
Annuities are an interesting type of investment because, throughout the life of the investment, you receive periodic payments. In an annuity, you enter a purchase contract with a financial institution. The payments of annuities are commonly used by people who are retired. This is because they pay out the investor a constant stream of income. Annuities can be purchased by individuals, which is ideal when a person cannot be part of a retirement plan through their employer.
Annuities may be fixed, variable, immediate, or deferred. This gives the investor some flexibility in how they are going to be paid out. They tend to not have high-growth in terms of return but make up for it by the fact that they are quite a low-risk investment. Be aware that they should not be used as the primary source of retirement savings, but they do help to make some extra income for that time.
Cryptocurrencies are some of the most volatile investments. They are extremely risky because their values have such intense and regular fluctuations. The most well-known cryptocurrency is Bitcoin. Since Bitcoin’s inception, there have been many other types introduced into the market. Cryptocurrency is essentially virtual money that can be used with some retailers to make purchases. They are also bought and sold on their own exchange markets. It is important to note that this type of currency is unregulated in that it does not have government backing. This is another reason for its volatility. It can be quite expensive to buy into certain cryptocurrencies, but the hope is that the payoff is worth it.
Gold is a type of commodity that you can invest in. Gold is what the value of our dollar is based on. Because of this, there is some volatility in the value of your investment. The cost of gold fluctuates based on fear and scarcity. All that being said, gold always has some sort of value because our money is backed by gold. But if investing in gold, you must be prepared that scarcity is going to drive the price and the demand for the commodity.
A commodity is an actual item or product that you are able to purchase. These can be things such as coal, solar power, or oil. They may also be agricultural products like corn, barley, or wheat. There are also other common commodities that are traded, such as silver and gold. Political unrest, weather, and global disease can significantly impact the value of a product. The prices of commodities can change very quickly in reaction to the state of affairs around the world.
Real estate tends to be a more stable way to invest your money. In this case, you are investing in an actual physical building. The value fluctuates with the market demand, but it can be much easier for an investor to understand. Real estate also tends to hold its value over a number of years. It is not totally liquid because the sale of real estate is dependent on how quickly your building can sell. However, when the real estate does sell, it gives you access to large sums of cash.
Unlike stock investments, real estate can be purchased over time. This makes it a lucrative investment. A person is able to get into the real estate market for a cost upfront (the down payment) and then pay off the balance plus interest through a mortgage. Interestingly, when buying a property for investment purposes, you do not need the traditional down payment of 20%. Often, depending on where you live, a bank allows you to make a down payment of only 5%. This will enable people to become landlords or to flip real estate because they can take out second mortgages in order to pay for their income property.
Real estate can be purchased in several different ways. For example, an investor can purchase either commercial or residential properties. Another option is to get into the REIT market. A REIT is a real estate investment trust. A person can purchase shares in a REIT, which acts kind of like mutual funds for real estate. Here, investors pool their money so they can purchase properties together. Obviously, this allows people to invest in real estate who may not have the funding to purchase an entire property on their own. REITs are then traded like stocks on the same exchanges as mutual funds.
It is essential to understand that some things we spend our money on should not be considered investments. However, we may like to believe that they are investments. A great example of this is the purchase of a car. A car is a depreciating asset. Over time, the value of the asset goes down because you own and use them. Other assets like this are couches, televisions, and appliances. Sure, you can always sell them later to recoup some money, but more often than not, they are not worth more because you owned them. Often, many collections fall into this category as well. Of course, it is possible that the collection of an item may one day be worth thousands more than you paid. However, this is not guaranteed in any way, and the value of a collection is only worth as much as someone is willing to pay for it.
Beginning to Invest
There are so many ways to invest your money. Each type of investment comes with its own risk and reward, each being geared towards beginners or experts. It is essential to understand your risk comfort level and your comprehension of how an investment works before putting your money in.
If you are new to investing, consider starting with mutual funds or ETFs. They are fairly stable and easy to understand for beginners. It is also a very good idea to consult with a professional. They are able to find the best way for you to invest to meet your goals.
Finally, never invest in something you do not understand and do not take advice for people you cannot trust. Take the time to do your research and consult with a professional in the field.