Types of Investments
There are so many different types of investments. Trying to understand and navigate them can be overwhelming and confusing. In this article, we will briefly go over different types of investments to help you understand what is available to you.
Ownership investments are assets that you purchase
- Stocks: When you buy a stock, you are purchasing a share of a company. Your share gives you a stake in the value of the company and its profits.
- Real Estate: If you purchase real estate with the intention to rent it or resell it for a profit, it is considered an ownership investment.
- Precious Objects: A precious object would be considered art or other collectibles. It is an investment when you purchase them with the intent to resell them for a profit.
A lending investment is a type of debt instrument. When you buy a lending investment you are buying a debt that will be repaid to you. These types of investments have a low risk, but this comes with a low return. Lending investments include:
- Bonds: Basically, a bond is a loan to a company. In exchange for the funds, the company promises to pay you back over a set period of time at a fixed interest rate.
- CDs: A CD, or Certificate of Deposit, is a promissory note that a bank issue to you in exchange for your money. With a CD you are required to leave your money in the account for a set period of time. During this time you will earn a fixed interest rate. The longer you leave your money in the CD, typically, the higher your interest rate will be.
- TIPS: Treasury-Inflation Protected Securities, or TIPS, are bonds that are backed by the US Treasury. At the maturity date, you will receive back your principal, as well as accrued interest. These amounts will also be adjusted for inflation.
Alternative investments are investments that could be considered ownership or lending investments depending on how they are purchased. They are not your typical stocks or bonds and tend to be a little complex. Alternative investments can include:
- REITs: REITs, or Real Estate Investment Trusts, are a type of investment that allows you to invest in real property without having to purchase actual property. When you buy into an REIT you are purchasing a share with a company and will share in the profits that they earn on their real estate investments. There are two types of REITS. With type one, you are given a share in actual real estate property. With the second type, you are investing in mortgages as opposed to real property.
- Venture Capital: This is money that you give to a new business. You do this with the hope that your cash will help the company to gown and you will receive a return on your investment
- Commodities: Commodities are very complex investments. Very basically, a commodity is a natural resource, such as oil or coffee. You invest in them by buying futures contracts. Commodities are typically used by large corporations to help keep their costs low.
Funds are pools of investments that are professionally managed so as to try and get the best return possible. There are many different types of funds. Some of these include:
- Mutual funds: A mutual fund is a pool of different types of investments. Each mutual fund is created with a specific investing objective in mind. They are actively managed by an investment manager to keep up with reaching the stated investment objective.
- Index funds: An index fund is a pool of investments organized with the objective to copy the return of a specific index, like the S&P 500. Index funds are passively managed, so they typically have lower fees than mutual funds
Choosing Where to Invest
A good investment portfolio will include a variety of different types of investments. An investment advisor helps you to choose the investments that are right for you and your situation.
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