Especially for the uninitiated, investing can seem like a very daunting venture. You’ve probably been told by friends, family, and financial advisors that you should be investing for your retirement and other future plans. However, if you don’t understand the basics of the various types of investments available, how can you make a sound choice about where your hard-earned money is best spent?
In this article, you will learn about the major types of investments that are available. With this information, you will be better equipped to make investment decisions that make sense for you, your family, and your short and long-term goals. If the idea of investing is completely new to you, consider checking out the Introduction to Stocks, Futures, Forex & Options Markets course to learn more about the investment opportunities described below.
A bond is grouped into a general role category known as fixed income securities. Typically, a bond is used to refer to any security that is founded on debt. This means that when you purchase a bond, you are lending your money to a company or the government. The other entity agrees to give you a certain amount of interest on your money after a set period of time.
Bonds are popular because they are considered extremely safe in the investment world. As long as you are buying bonds from a stable entity (such as the government), your investment is practically guaranteed. In other words, there is little to no risk when investing in bonds.
As you will learn in the investment world, little risk usually means little reward. The rate of return on bonds is generally the lowest of all commonly traded securities; however, remember that the risk is also much lower than many other investment opportunities.
The Bond Market Guide for Beginners explains the concept of investing in bonds in more detail.
Sometimes known as equities, stocks allow you to become a part owner of a business. As a stockholder, you are allowed to vote at shareholders meetings and receive a portion of any profits that the company allocates to the shareholders. These profits are known as dividends and can result in significant earnings for businesses doing well.
Unlike bonds (which are very stable), stocks are considered volatile. If you have ever seen a stock ticker, you might notice how much a single stock can fluctuate in value on a daily basis. Purchasing stock does not guarantee you any return it all. Many stocks don’t pay dividends meaning that the only way you can make money is if the value of the stock increases. Keep in mind that this is not guaranteed. In fact, many stocks lose value and your money can be lost quickly.
This high risk does provide the potential for high returns. If you are willing to assume the risk of losing your investments, you can often generate significant profits from investing in stocks.
You can learn some basic investment strategies for the stock market in the How to Invest in the Stock Market course.
A mutual fund is a collection of stocks and bonds. Purchasing a mutual fund means you are pooling your money together with other investors. This large pool of money is managed by a professional broker who receives a small portion of any profits generated in return for selecting specific securities on your behalf.
Mutual funds often focus on a specific strategy. You could purchase a mutual fund that focuses exclusively on large stocks, small stocks, or stocks in specific industries.
The advantage to investing in mutual funds is that you can invest your money without spending a lot of time researching potential investments personally. In theory, you should have a higher success rate as an inexperienced investor by working with a professional mutual fund manager then you would if you were picking stocks and bonds on your own. However, this is not always the case.
In addition to bonds (purchasing debt) and stocks (purchasing equity), there are a number of other investment opportunities available that are typically not recommended for beginners. These opportunities, however, can be extremely lucrative once you understand how they work and some of the basic principles involved in investing in these alternative vehicles.
Gold is one example of an alternative investment that can be very profitable if done correctly. By purchasing gold, you are basically assuming that the price of gold will continue to rise. Although gold has risen steadily over the years, it could fall at any time and is still considered a volatile market.
Another popular alternative investment is known as the foreign exchange, or Forex. In this type of investment, you are comparing the value of two different currencies and attempting to profit from the difference through a series of purchases and sales. You can learn more about Forex trading in the Comprehensive Forex Mastery Program.
It may seem tempting to jump right into Forex, gold, real estate or any number of alternative investment strategies as this is where many of the “get rich quick” stories emerge from. Unfortunately, more people lose money in these volatile markets than you might expect and most experts recommend that you start with stocks, bonds, and mutual funds before risking your assets in some of these more volatile (but potentially lucrative) alternative investment vehicles.
Investing is something that nearly everyone can be successful at once they understand the basic principles and the potential risks associated with each type of investment. Take some time to understand in detail how you might benefit from a particular type of investment. If you have any questions, consult with a financial advisor who can usually guide you in the right direction based on your short and long-term goals.
Remember that the more time you spend investing, the more likely you are to achieve long-term success. Don’t put off investing any longer – get started today to secure your financial future.