From real estate to bonds to money market funds, you can invest your money in various ways. Investment types can vary greatly, but the most common investments are stocks, bonds, mutual funds,cash equivalents and alternative investments. If you are considering investing your money, read on to learn about the different investment opportunities available.
In basic terms, a stock represents a share of legal ownership in a business. Stocks, sometimes called equities, entitle you to a portion of the business’s profits and assets. There are two primary types of stock: common and preferred.
A common stock entitles you to a portion of the corporation’s earnings and losses. It also typically gives you a vote at shareholder meetings. Because of common stock’s potential for greater returns, this type of investment is more popular among seasoned investors and is generally what people refer to when they are talking about stock.
A preferred stock does not typically entitle you to appreciation in value or voting rights. However, owning a preferred stock does guarantee you the right to receiving a specific dividend payment at a predetermined time. Should the company go bankrupt and liquidate, preferred stockholders are paid off before common shareholders, thus making preferred stocks a less risky investment.
A bond is a loan you make to a company or institution. In return, that organization promises to pay you back with interest. Corporations and governments utilize bonds to fund things like projects and the costs of operation and expansion.
Compared to common stocks, bonds are a low-risk investment. Buying a stock from a stable entity virtually guarantees your investment. However, due to their low risk, bonds also come with a lower potential for return. Because you can generally predict the amount of money you will receive from your bond, this type of investment is often called a “fixed-income” investment. Issued by governments, cities, businesses, and international bodies, bonds come in many different forms. Review common types of bonds below.
U.S. Treasury securities are issued by the federal government and guaranteed by a “full faith and credit” guarantee. This type off bond is a very safe investment due to this guarantee. The federal government also issues U.S. savings bonds, and this bond is backed by the same guarantee as U.S. Treasury securities. However, unlike Treasury Securities, U.S. Savings bonds can be purchased for a very small investment. Municipal bonds are issued by local government entities, including states, counties and cities.
Corporate bonds are a form of debt financing issued by businesses to raise funding for things like ongoing operations and expansions. Asset-backed securities are issued by financial institutions, and are collateralized by assets like loans, credit card debt or leases. Mortgage-backed securities are similar to asset-backed securities but backed by mortgages instead of other assets.
A mutual fund is a pool of money contributed by many individual investors and organizations to invest in collection of stocks, bonds, and other securities known as a portfolio. A professional portfolio or fund manager, who is responsible for buying and selling securities within the portfolio to maximize capital gains and/or income for the shareholders, handles mutual funds.
A mutual fund can be a wise type of investment if you are an individual investor with little time or experience to oversee investments, since these types of investments are managed by a seasoned, professional fund manager. The fund manager devotes his or her to monitoring portfolios and market conditions to make profitable investment decisions for your money.
Mutual funds can be broken down into three basic categories.
- Equity or growth funds are invested primarily in stocks, typically with the objective of long-term capital growth.
- Fixed-income funds buy short-term, fixed-income securities that are generally low risk, like treasury bills, government bonds and investment-grade corporate bonds.
- Balanced funds are invested in a combination of both stocks and bonds.
Cash equivalents are short-term investments that can be easily converted into known amounts of cash. Cash equivalents typically come with a very stable, but very low, return rate. See common examples of cash equivalents below.
- Money market funds function much like a fusion of checking and savings accounts, but these pay slightly higher interest rates. This account type has limits on the transactions you can perform and it can have a higher balance requirement than other types of deposit accounts from your bank.
- Certificates of deposit (CD) are a type of account that prevents a holder from withdrawing funds for a certain amount of time. This money, however, accrues interest over the restricted access period.
Alternative investments can be broadly defined as assets that fall outside of traditional investments like stocks, bonds and cash equivalents. Alternative investments encompass a wide range of investment strategies, including, but not limited to, the methods listed below.
- Real estate investments can come in many forms, including housing, apartments, office buildings and other residential or commercial buildings you purchase to either rent out or fix up and resell. Another type of real estate investment involves the purchase of a real estate investment trust (REIT). When you purchase an REIT, you are effectively investing in shares of a company that makes debt or equity investments in real estate. As a holder of an REIT, you earn income from its investments in the form of dividends. Much like mutual funds, REITs give you access to real estate investments without having to purchase or manage the properties yourself.
- Hedge funds work much like mutual funds, with many investors pooling cash to invest in different securities. However, hedge funds are generally reserved for wealthy, experienced investors, often requiring a minimum investment of $1 million.
- Venture capital funds are direct investments in early- to growth-stage companies or startups who are seeking funding to expand. Venture capital is a riskier form of investment, but with to potential for huge returns depending on the level of success of the startup.
- Franchising involves purchasing an existing company that comes with a ready-made business model, training and support. Purchasing a franchise may be an appropriate investment if you are interested in running a business as well as making an investment.
- Real asset investments may be defined as purchasing tangible assets like precious metals and luxury goods, such as art, wine, rare coins and comic books.
By Melanie Henson –