Updated: Jan 27
Investing can be intimidating especially for beginners. There's so many options to choose from, and it’s best to evaluate what options will be a good fit for you. This easy guide will walk you through the most common types of investment available to grow your money this year. If you need additional help creating a financial plan and strategy contact us for a free consultation.
"The best time to start investing was 10 years ago, the second best time is now"-unknown
What are investments?
Investments are products purchased with the expectation of producing income or profit.
Certificate of Deposit
A certificate of deposit or CD is considered a low-risk investments, so if you’re new to investing or risk-averse, this option could be a good place to start. You deposit a certain amount of money for a predetermined amount of time into your bank. When that time period is over, you get your principal back, plus a predetermined amount of interest. The longer the loan period, the higher your interest rate.
Typically due to low returns. cash investments such as CDs or money market accounts are less about growing your money and more about keeping your money safe.
Investing in the stock market is the most powerful tool you can use to build wealth. Stocks, also known as equities or shares, are units of ownership in a publicly traded company. When you purchase stocks, you take partial ownership in that company. Whether you make or lose money on a stock depends on the success or failure of the company, which type of stock you own, and what’s going on in the stock market overall. Typically, there are two ways you can make money owning stocks. When a company is doing well and share prices increase, you can sell shares at a profit or receive dividends. Dividends are when companies share profit with shareholders. However, if a company is doing poorly and share prices plummet, you can lose money if you decide to sell. Keep in mind losses do not become actual losses until you sell your stocks at a losing price. Because the profitability of your stock depends entirely on the success of the company you’ve invested in, it’s a riskier form of investment.
Cryptocurrencies are a fairly new type of investment. Bitcoin is the most famous cryptocurrency as well as ethereum, bitcoin cash, litecoin and countless others. Cryptocurrencies are digital currencies that don’t have any government backing. You can buy and sell them on cryptocurrency exchanges.
Cryptos often have wild fluctuations, making them a very risky investment.
Bonds are when you lend money to the government, cities, or a corporation. When you buy a bond, you’re allowing the bond issuer to borrow money and pay you back interest until the bond expires. They’re considered fixed-income securities, because the borrower has to pay interest on the loan until the full principal is paid. You’re now the creditor or debt-holder in this scenario. There are many different types of bonds. Short-term treasury bonds (matures within 3 years) are the safest, but pay the least amount of interest. The next safest, with higher returns, are long-term treasury bonds (like the benchmark 10-year T-note). Municipal bonds issued by cities offer higher returns than treasury bonds but are riskier. Lastly, the highest paying and highest risk bonds are a type of corporate bond called junk bonds.
A mutual fund is a type of investment that pools money from a group of investors to invest in stocks, bonds, and other assets. Mutual funds offer diversified professionally managed portfolios to small and large investors alike. Instead of owning one individual stock, a share of a mutual fund represents investments in many different stocks (or other securities). Mutual funds are either open-ended, where trading is between investors and the fund and the number of shares available are limitless, or closed-ended, where the fund issues a set number of shares regardless of investor demand
Exchange Traded Fund
Exchange Traded funds, or ETFs, are similar to mutual funds in that they are a collection of investments that tracks a market index. Unlike mutual funds, ETFs are low-cost, tax-efficient funds that are traded directly on stock exchanges and have the benefit of stock, commodities, and bonds. For example, ETFs can be bought and sold throughout the trading day compared to mutual funds that are purchased and sold directly between investors and the fund at the end of the business day based on calculated price. ETFs also typically carry lower fees and are more liquid than equivalent mutual funds.Index Funds
Thankfully, you don’t have to be a stock-picking genius to grow your money in the stock market. Index funds provide a way to invest in the stock market that is completely passive. Billionaire investor Warren Buffett suggests everyday investors stick to a low-cost S&P 500 index fund. An index fund is a type of mutual fund or ETF that holds all of the securities in a specific index, with the goal of matching the performance of that benchmark as closely as possible. Simply put, they’re just a basket of stocks that represent a broad market. In the case of an S&P 500 index fund, you’re buying a small piece of the 500 largest publicly traded U.S. companies. This results in automatic diversification, which minimizes your overall risk. Importantly, there’s no market timing or individual stock picking involved. The fund simply tracks the performance of the stock index. The most common ways to invest in index funds are by opening a brokerage account directly through a fund owner, whether it be Vanguard, Fidelity, or Charles Schwab, or through your retirement account, such as a 401(k).
There are basically two types of retirement plans available: employer sponsored (401k or 403 (b)) and individual retirement accounts (IRA). In terms of individual retirement accounts, you have
1. Traditional IRA-you can put pre-tax income into the investments of your choice, which will then grow tax-deferred until you withdraw the money.
2. Roth IRA- your contributions are not tax deductible but your earning grow tax-free.
Both types of retirement plans are made up of cash you put aside and then invest in various ways including stocks, bond, and funds. The risk and reward of retirement accounts are dependent on what they are invested in. The biggest advantage for retirement plans — other than Roth IRA plans — is that you put in pre-tax dollars. You won’t pay taxes on the money until you withdraw it in retirement, when you will presumably be in a lower tax bracket.
Real estate is another kind of ownership investment where the investor purchases property to resell or rent. Though your primary home can appreciate in value, it’s not considered an investment, because it’s filling a basic need for shelter. Property rental is a great way to collect multiple streams of income. With property rental, you put down either your own money or a loan to buy the property. You’ll then decide if you need to invest anything more in the property to increase its worth. Then you’ll start renting it out and your rental will become a passive-income stream.
Realestate Investment Trusts
Now, apart from investing in property directly, there are many other choices to do it in a truly passive way, like investing in real-estate stocks or real-estate investment trusts (REITs). REITs (pronounced ‘reets’) are companies that make investments in and own income-generating real-estate properties. Investors buy shares of the REITs and the REITs use that money to make investments. The REITs then typically earn income from rent payments or interest on real-estate debt. This is something like a mutual fund holding various real-estate projects. The fund is managed by professionals, so you never have to get involved. One of the big benefits of investing in REITs is that they typically pay higher dividends than stocks, bonds, or bank investments. You can also sell your shares in REITs anytime you like, which makes it more liquid than owning real estate outright. The downside, however, is that REITs dividends are typically taxed higher than qualified dividends.Property
So, What Are the Best Types of Investments?
Everyone’s reasons for investing are different, so you have to do your due diligence and decide which investment types suit your lifestyle, timeline, goals, and risk tolerance best. I’m not your financial advisor, but here’s what I would do:
First, I’d open up a Roth IRA and invest for retirement so my money can grow tax-free. Then, if I just wanted to invest my money with little research and forget about it, I’d put a chunk of it into an Index Fund such as the S&P 500 or the Russel 2000. Lastly, but certainly not the least of these, I’d invest in the stock market. This is the best place to invest with a small amount of money and get big returns.
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