Chapter 05: Types of Investments
Now that you have a better understanding of what investing is and why it’s important to create an investment plan, we can discuss the different types of investment assets. There are various types of investments, so it’s important to familiarize yourself with them so you can make an informed decision of which types are best suited for you.
If you want to get ahead in life without spending every waking minute at work, investing your money can be a smart move. Investments can provide a steady income that helps build your savings or retirement account, and there are lots of ways to go about it.
If you plan on investing, understanding your different types of investments and the pros and cons of each option is important. Choosing the right type of investment for your financial situation is crucial because some investments carry more risk than others. That said, those same investments typically offer a greater return when things go well—but it’s up to you to figure out which investments are right for you.
To help you navigate this new chapter and find investments that are a good fit for your circumstances, we’ve created this guide. In this chapter, we’ll be going over the different types of investments, the best types of investments for beginners, how to start investing, and more.
Find out more about some of the most common types of investments and how you can start investing today. Use the links below to go straight to a specific investment you’ve been wanting to learn about.
What Types of Investments Are There?
There are many different investment options that you can choose to put your money into, but they’re not all created equal and some may be better suited for different types of investors.
Here are 11 of the most common types of investment assets and why you should consider prioritizing them:
Stocks are one of the most common investment types—according to a Gallup poll, 56% of Americans reported that they own stock in 2021. That’s because it’s fairly easy to get started and you don’t have to risk a fortune, but what is a stock? A stock allows you to invest in a company, which can earn you money in the form of appreciation or dividends. The stock market is where you can go to buy and sell shares in companies.
If you’re going to invest in stocks, it’s typically best to make sure you diversify your portfolio by investing in several companies. That way, your investment doesn’t depend on the success of a single company.
A bond is essentially a loan you can offer to governments and corporations, which allows you to earn money from interest paid on the loan. Savings bonds are a low-risk, low-return investment and can be a vital part of your investment portfolio. Governments and corporations need loans to complete large projects, whether that’s the construction of a new building, a new road, or a school. In order to fund these projects, organizations rely on bonds from investors, which all combine to fund large projects. Municipal bonds are bonds that are issued directly by the state or local government.
Certificates of Deposit (CDs)
If you’re looking for a way to add a slow, steady stream of income, certificates of deposit (CDs) might be a good option. With a CD, a bank agrees to pay a higher interest rate if you agree to leave a predetermined amount of money in a bank account untouched for a certain amount of time.
CDs are well suited for those who are looking for low-risk investments, but it’s typically best to combine them with different types of investments for a diversified portfolio. CDs are an option if you want a short-term investment where you can try to grow your wealth in a shorter amount of time.
It’s also important to note that CD interest rates are typically higher at credit unions and local banks, so you may want to try and avoid larger national banks.
One way to make it easier to get started and track your investments is to invest in a mutual fund. A mutual fund combines money from individual investors and uses it to invest in stocks, bonds, and short-term debt. Instead of having to build your own investment portfolio, mutual funds decide how to invest and establish a portfolio for you.
By investing in shares of a mutual fund, you have part ownership of the income generated. If you’re looking for relatively safe types of investments, choose a mutual fund that has a history of stability rather than volatility.
For example, the money you save in retirement accounts can be invested in a mutual fund. So if you have a 401(k) plan or a Roth IRA, you can choose to invest that money in a mutual fund account, which can help to preserve your assets and income.
Exchange-Traded Funds (ETFs)
What is an ETF? An exchange-traded fund (ETF) is a type of investment that tracks a certain industry, commodity, or another asset, but can be purchased and sold on the stock exchange. There are several options when it comes to this type of investment, including:
- Stock ETFs
- Bond ETFs
- Industry ETFs
- Commodity ETFs
- Currency ETFs
- Inverse ETFs
Some examples of ETFs include the SPDR Dow Jones Industrial Average (DIA) and the SPDR S&P 500 (SPY). ETFs are a good way to invest in stocks across various industries, which can help reduce your investment risk by diversifying your portfolio.
Options are a bit different than the other types of investments we’ve discussed. An option is essentially a contract that gives the purchaser the right to buy or sell underlying assets at a set price. Your contract will include an expiration date by which you must exercise your option if you choose to do so.
Options allow you to invest in important natural resources like oil without having to spend a fortune. While there are several opportunities to profit through investing in options, they’re one of the more complex investments, so it’s usually best to talk with an expert before investing in options.
An annuity is an investment opportunity offered by insurance companies that allows you to make contributions in return for periodic payments in the future. Annuities start with the contribution period, during which you (the investor) make several small payments or one lump-sum payment to fund your annuity. Once your fund has been annuitized, you will begin receiving periodic payments. You can choose to have this amount paid out over a fixed period of time or for the remainder of your lifetime.
Commodities are the resources people use in everyday life, from precious metals and food to natural gas and oil. As an investor, you can diversify your portfolio and reduce risks by investing in commodities, and there are more ways to do that than ever. You can invest in commodities through stocks, exchange-traded funds, exchange-traded notes, mutual and index funds, and commodity pools and managed futures. If you want to broaden your investment portfolio, commodities are great.
Cryptocurrencies such as Bitcoin and Ethereum are becoming increasingly popular investment options. The idea is that these currencies increase in value due to a limited supply. So, for example, your purchase of $1,000 may be worth $2,000 in the future if demand rises. A cryptocurrency exchange is an online platform where you can go to buy and sell cryptocurrencies for a small fee. While this can be a lucrative investment, it’s also one of the riskiest investments you can make.
From silver and gold to platinum and palladium, all these precious metals can be turned into investment opportunities. These precious metals will always be in limited supply, and they’re constantly being used for electronics, jewelry, and more. You can buy raw precious metals such as gold, silver, and palladium and hold onto them, selling them when they increase in price. Because there is a fixed supply and high demand for these metals, they tend to steadily increase in price. If you do invest in precious metals, make sure you have a safe place to store them.
What Are the Best Types of Investments for Beginners?
If you’re just getting started with investing, it’s usually recommended that you avoid high-risk or complex investments. As a beginner, consider sticking to low-risk, low-yield investments such as CDs until you gain a better understanding of how investments work and what your risk tolerance is.
Once you’ve built a small portfolio, you can invest in mutual funds and ETFs, or you can start learning about investing in stocks and give that a try. You have plenty of time to learn, so make sure you consider starting out small and more conservative when it comes to investments. The key is to learn the fundamentals before you start making major moves.
How to Start Investing
There’s no time like the present to start investing. However, for a lot of people, getting started is the hardest part. Here are a few easy steps you can follow to get started on the right foot:
- Decide on a monthly investment budget.
- Learn about the different types of investments and their risks.
- Set goals and choose the types of investments that fit them.
- Figure out how you’ll start investing.
- Monitor your investments regularly.
You can talk to a financial advisor at your bank and ask about a CD or high-yield savings account. Your bank may even offer investment services beyond basic savings accounts. Alternatively, you can work with an investment firm to find a financial planner who can help you figure out the best investments for you.
There are also several apps and services that allow you to invest as well, including stock trading apps, cryptocurrency apps, and more. This is a good way to try investing without spending too much time or money.
Choose an Investment & Get Started
No matter how you choose to invest, getting started now rather than later is of the utmost importance. The sooner you start investing, the more time you’ll have to build a robust portfolio and plan for the future. From stocks and bonds to cryptocurrencies and precious metals, there are lots of ways to invest your money. Start investing today and use the Mint app to monitor your investments, so you can make the best decisions for a brighter future.
Once you’ve read this chapter and have a better idea of the different types of investments and how they work, you can move onto the next section in the series, where we’ll go over how to create an investment account.
This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice. You should seek the assistance of a professional for tax and investment advice.
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