10 Types of Investments Explained

You’ve decided. You’ll invest your surplus money. But in what? Why? And how?The common starting place is the stock market. However, there are other options beyond throwing all your cash at a company. Diversifying your investment types can also spread your risk. Every kind of investment comes with its own risk, and what you end up with ultimately depends on how much time you want to commit and your risk appetite. Growing money takes time, and if you after a get rich quick scheme, you’re more likely to lose money than make it.

Being aware of your personal tolerance towards risk can help you decide what kind of investment portfolio mix is best for you. Navigating the world of investing can quickly turn into a case of information overload. Everyone is constantly telling you to invest in something but never truly gives you the big picture of everything. So I’ve written this concise guide to help you get started and bring awareness towards things that may not be in your current peripheries.


Stocks

Stocks are all the rage nowadays. As technology makes it easier to invest, more people are buying and selling than ever before.

The way stocks work is when you buy a share, you are buying the ownership of a company. The actual percentage is minuscule unless you’re putting in millions. The difference between what you paid and what someone else will pay overtime is profit.

During this time, companies may pay out dividends, which is a payment made to the shareholders based on profits made. They calculate the final dividend distribution on a per-share basis and depend on the company’s cash flow, debt ratio, growth, and future investment plans.

Risk factor and returns

People pick stocks because of the potential returns. We’ve all heard the unicorn stories of people investing in companies like Apple and Microsoft when stocks were worth less than $1. Now they’re in the $100s, regardless of whatever is happening right now in the world.

But these are just run away stories, with investments made several decades ago.

Unless you’re in it for the long haul, stocks can fluctuate in value depending on world events, discoveries, shortages, surpluses, consumer value shifts, product releases, market competition, year-to-year sales growth, among a myriad of many other factors.

When you buy a single stock, you take on the risk of the value dropping as much as it rising.


Bonds

A bond is a loan you make to a government entity, council, or company. Unlike shares, you don’t have any ownership or stake in the place you bought your bonds from.

In return for temporarily letting them use your money, they give you interest rates that are often higher than bank rates. On the surface this sounds sort of like a term deposit, but the major difference is that you can sell your bonds. You don’t have to hold it until ‘maturity’ — which is the date you get your money back.

The price you can get for selling your bonds often sits somewhere between the bond and the profit you’d get from the interest.

Risk factor and returns

Bonds are a short to long-term investment option depending on the lending market. When government agencies want to curb inflation, bond values often go up.

Why? Because borrowing increases money in the system and therefore can decrease the value of money. When there is too much money in the system at any one time, major inflation can occur.

When governments want to increase household spending and create a market stimulus, it costs less to borrow.

Financial institutions make money through the difference between what they charge to lend and what they give to borrow money. When you take out a bond, you are giving your money over to financial institutions to ‘borrow’ for a particular amount of time for a specified set price.


Mutual Funds

A mutual fund is a financial package set up by institutions that pool together money from multiple investors and invest in a diverse range of options such as stocks, bonds, money markets, and other assets.

You often pay a small percentage fee and there are risk profiles that you can choose from. Performance is tracked, with losses and gains proportionately distributed based on how much you’ve contributed to the fund.

Risk factor and returns

While in theory, you ‘own’ part of the company your mutual fund has invested in, it doesn’t give you the same rights and dividend distributions as you would with playing the stock market.

However, it does de-risk your investments by spreading it across multiple investment types. Some mutual funds pay dividends directly to you, while others reinvest the money and apportion the value back to you.

Institutions often have different risk profiles, depending on how long you intend to invest. The longer you plan to keep your investment, the higher the potential return based on the risk portfolio you’ve chosen.

However, you don’t have to take on the high-risk option if that’s not your thing. You can still invest in a balanced fund that protects your money from major fluctuations but still grow it over time.


Exchange-Traded Funds

Exchange-traded funds or commonly known as ETF is similar to a mutual fund, except it’s listed on the exchange. This means that it can be bought and sold on demand. You can buy and sell ETF shares throughout the day as you would with normal stocks.

The major difference between ETF and common stock is that you are buying into a stack of investments that can be anything from a mixture of stocks, commodities, or bonds that can be within the country or internationally.

Risk factor and returns

ETFs are often considered low risk because of its diversification factor. It’s a mix of mutual funds and stocks. However, liquidity is not the same as stocks and mutual funds, in addition to the potential to incur tax surprises.

ETFs feels like a simple concept but have a complex behind the scenes, and it’s not immune to market, political, and business risk.

When it comes to liquidity, ETF has their own way of calculating the exchange for stocks within the fund, which it has to go and potentially sell-off or buy, depending on the circumstances. Capital gains are actually paid to the authorized participants, who are almost equivalent to your mutual fund manager, meaning that you don’t get to enjoy the difference in value gain — only what the final indexed and market value.


Certificates of Deposit

Certificates of deposits, or term deposits, is a product that’s provided by banks and credit unions that promise higher interest rates if you agree to lock your money away for a specific period.

This time can range from a year to 5 years. You can have your interest gains reinvested back into the deposit or paid out to your bank account. Early withdrawals often incur some penalty.

Risk factor and returns

Different financial institutions offer different rates for locking your money away.

The rate is usually higher than your regular savings account but won’t exceed loan interest rates. The major perk of deposits is that if you locked in a high return percentage when the economy required institutions to raise their interest rates, you can end up much better off than just leaving your money in your savings account.

However, you won’t have access to that money until your term is over. Currently, rates aren’t that great anywhere, but it’s still good to know about certificates of deposits.

Terms can last between three months to five years with fixed rates.


Retirement Plans

A retirement plan is often a mutual fund of some sort, except the major difference is that you can’t touch the money until you reach a certain age, or qualify under major life incidents like terminal illnesses or severe financial hardship.

The money is yours — just harder to get to than other investment options.

Risk factor and returns

Most countries have some form of a retirement plan. Sometimes, your contributions are matched by the government and/or your employer. Most of the time, retirement plans that are formed by the government come with tax benefits.

The point of a retirement plan is that it gives you a financial nest egg that you can tap into once you’ve reached a particular age. The longer you’ve been contributing, the higher the total fund will be against the actual dollar values you put in.


Options

Options are a slightly more complicated version of buying and selling stocks. Rather than buying and selling ownership outright, you are paying the right to buy those shares for a particular price at a particular date.

At its simplest, when the due date hits, the buyer gets ownership of the stock at the price of the option, regardless of whatever the actual price is. The profit or loss made is the difference between what you paid for the option and the actual share price.

Risk factor and returns

When you buy or sell an option, you are placing a bet on which direction the final price will turn.

For example, if you bought an option from Sally for $100 and the final stock value comes to $200, you would have made a profit because the shares are now worth double what you paid for them.

However, if things turn the other way and the final stock price comes to $50 in value, you’ve just lost half your investment while Sally is protected from the price drop and may have made a profit from whoever she bought the option from.


Annuities

An annuity is a specified on-going retirement payment based on an amount you put in. It starts at your retirement age and is guaranteed until the day you see the grave.

Your investment grows based on a guaranteed rate of return, regardless of how your investment is actually doing. Some annuity plan allows you to transfer your payouts over to your surviving spouse upon your death.

Risk factor and returns

An annuity is essentially an insurance scheme that assumes the risk of you living beyond the value of your investment. There are different versions of annuities available but the two main ones are fixed and variable annuities.

A fixed annuity is basically a savings account, but with an insurance company with a guaranteed rate of return and only drawable at a fixed rate after you’ve reached a certain age.

Variable annuities are usually mutual funds repackaged and with some tax benefits.

The main reason why people get into annuities is because of the guaranteed return. Because annuities are often with insurance companies, there are many caveats and clauses that can work against you when you want to access your money earlier, sometimes with tax penalties as well depending on the plan you’re on.

Real profit only truly materializes if you live beyond your invested amount, but apart from that, you don’t really know for sure what your actual profit on investment is.


Cryptocurrencies

Cryptocurrency is like any other currency exchange, except it’s not tied to a specific country’s GDP or monetary value. It’s an independent digital currency that doesn’t have any actual governmental backing. It runs on buyer and seller confidence rather than actual output.

Risk factor and returns

Cryptocurrencies such as bitcoin depend on the collective confidence of the people that use it to maintain its existence. Because of the way it’s generated, any major progress in hardware used to mine a bitcoin, the derived value can be reduced as a result.

Some countries have banned cryptocurrencies completely, making it illegal to use, trade, or own it.

There are legal concerns over cryptocurrencies being a vehicle for money laundering activities. In part, it’s because the digital currency has no governing authority and anonymous transactions can occur without traceability.


Commodities

Commodities are physical products that you can buy like gold and silver. They are physical in nature and can be traded and exchanged accordingly. You can also buy agricultural and energy products.

Pricing and profits in commodities depends on production, demand and potential output capacity. For example, for agricultural products, a drought can cause a shortage in commodities, resulting in rises in price and giving you the potential to make large profits.

In contrast, if increased production is expected with dropping demand, the price of the commodity may drop as a result.

Risk factor and returns

The commodities market sounds simple enough, but it fluctuates as much as the stock market, if not more. This fluctuation can create opportunities for people who are looking for big gains.

When you play the commodities market, you are buying into the raw materials used to create consumer goods. “Soft” commodities are perishable in nature and can lose their value over time if not sold in some form.

Commodities are often under-invested and demand can drive up prices, besides consumer demand, producers are exposed to price, cost, and quantity output risk. Climate and seasonal changes can have an impact on the supply and demand of a particular commodity such as grains, poultry, and beef, driving prices up and down accordingly.


Final Thoughts

I wrote this guide with the beginner investor in mind. There are a lot of articles on the internet that tells you what to invest in, based on current trends, without explaining what it is, the risk, and other contributing factors that can ultimately affect your final dollar value.

The information on each option type is brief — but hopefully with enough detail to get you properly started. It’s better to know your choices rather than just jumping straight in.

What most articles will tell you is that investing will make you rich. What they don’t tell you is that investing will *eventually* make you rich.

The act of investing is not a get-rich-quick kind of scheme.

Long term and prudent investing is a different kind of ball game.

If you want a million dollars in the bank in a year or two, investing won’t get you there, unless you’ve got a sizeable amount of seed money at the beginning. You’re better off gambling it at starting your own business if making millions is on your mind, but you’ve got less than six months’ living expenses saved up. But that’s for a different discussion. I hope you found this piece useful and a friendly starter guide for your investing journey.

About Author /

Editor of Hustle Thrive Grow. On a quest to become a better human and documenting the journey in digital ink.

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