Investing 101: 10 Types of Investments
If you’ve found your way to this blog, it’s most likely because you are interested in investing for the first time or wanting to diversify your investment portfolio. We all know the basics of investing: you send money to a particular source, and that money increases and decreases with the market. You may earn money and your risk pays off, or your investment falls and you have room to improve.
As you consider how to invest, keep in mind that you have many investment options, allowing you to set the level of control you have over your financial investments. Here is your Investing 101 guide, and 10 types of investments you can make.
- Mutual Funds
- Exchange-Traded Funds
- Certificates of Deposit
- Retirement Plans
Stocks are a type of investment that give the owner a share of ownership in the company. There are many different types of stocks, and they all fluctuate up and down depending on the market.
With stocks, you can keep or sell them as you choose, and there is no limit to how long you hold onto them. When a big increase hits, you may choose to sell your stock and take the profits. The gamble, however, is that stock may reach even higher peaks once it’s no longer yours. On the other hand, if you hold onto a stock waiting for its highest peak, you may also lose money when it inevitably falls. If you’re looking to buy stocks, there are a few ways you can accomplish this.
Direct Stock Plans
There are some companies that allow you to buy or sell stocks directly through them. This route saves on commissions because you don’t go through a broker, but you most likely have to pay additional fees on the stock. Direct stock plans are common for employee shareholders or those that already have stock in the company. The downside of direct stocks is that they do not usually allow you to buy or sell shares at a particular market price and instead buy or sell shares at their set times.
Dividend Reinvestment Plans
A dividend reinvestment plan is only for those who already own stock in a company and want to buy more shares by reinvesting dividend payments. You and the company must come to an agreement about this particular type of stock and have a signed agreement.
You have the option to work with a full-service broker to buy and sell shares for you. For this service you have to pay a fee, known as a commission, to the broker for doing the work for you.
Stock funds are another way to purchase stocks. You can work with an investment firm or a broker to create a mutual fund that invests primarily in stocks. The type of stocks are determined by the funds investment goals and policies.
Bonds are different from stocks in that they provide a guaranteed return. An investor lends a set amount of money to a government or company in exchange for interest payments as well as the full return. Once a bond reaches maturity, the money is returned to the investor. Bonds are low-risk, but can take up to 10 years to mature depending on the type of bond and the maturity date.
Corporate bonds are issued by both public and private companies in order to fund their operations or other funding projects. These bonds are subject to all income taxes, both state and federal.
Government bonds are also called treasury bonds because they are issued by the U.S. Treasury Department. The money gained through corporate bonds funds all aspects of government activity. These bonds are subject to federal income taxes but are exempt from all state income tax regardless of where you live.
Local governments issue municipal bonds to fund community projects. The interest earned on these bonds are typically tax free at both the federal and state levels. They are an attractive investment for higher net worth individuals and those looking for tax-free income at retirement.
A mutual fund pools money from multiple investors and then invests that money into securities like stocks and bonds. The investor buys a share in a particular mutual fund and each share is representative of part ownership of the particular fund and any income the fund generates. Investors decide on mutual funds for a multitude of reasons, including management, diversification and affordability. Investing in a mutual fund guarantees that a professional does the research and works for you by selecting which investments they want to invest in.
\A mutual fund can also diversify your portfolio by having a range of companies and industries under your investment belt. Diversification can help lower your risk if one of your invested companies falls. Mutual funds are also typically a lower dollar amount initially than some of your big ticket investments. They give you a way to invest in larger companies without the hefty buy in.
Exchange-traded funds are the combination of mutual funds and regular stocks. They are pooled investment funds from multiple investors but shares are traded like stocks on the stock market. This investment offers you a professionally managed fund, but with the opportunity to buy on margin and sell on short. Exchange-traded funds allow you to make more money, but also come with more risk. This technique is used by primarily advanced investors, because the costs and potential risks can outway the potential reward. Exchange-traded funds can either be owned in taxable, tax-deferred, or tax-free.
Certificates of Deposit
Certificates of deposit are savings accounts that hold a particular amount of money for a particular amount of time, and in exchange, the holding bank pays interest. When you cash in your certificate of deposit, you are given the money that you initially invested plus an interest that accrued during the holding. Certificates of deposit are great for those who want an outline of where their money is going and what they can expect in return. The statement of disclosure should state when and how the interest is paid, as well as the maturity date and any penalties for early withdrawal. The risk of certificates of deposit are lower than other investments because you should not lose your initial investment. The risk, however, is that inflation may increase faster than your money and lower your return over time.
How you invest in a retirement plan is up to you. Some employers offer a retirement plan, such as a 401(k) or 403(b), but you can also create an individual IRA that you contribute to, either Roth or traditional. A 401(k) and a traditional IRA let you invest pre-tax dollars. This is a great option for someone who expects to be in the same or lower tax bracket when you begin to withdraw. Instead of paying taxes on the money up front, you will pay the tax when you withdraw it at retirement.
On the other hand, a Roth IRA is a great option for those who aren’t as concerned about this or plan to be in a higher tax bracket and want to be able to withdraw that money tax-free when they retire. Your entire earnings are taxed at the time of your deposit, allowing you to take out that money tax-free later.
When choosing a retirement plan to invest in, make sure you are doing all your research on your options in order to best suit your needs.
Options are an advanced and complex way to buy a stock, with the investor not actually owning a piece of the company. While option trading is becoming increasingly popular, it carries significant risk because of the complexity and difficulty of understanding how it works. If you are interested in options investing, talk to a financial professional for a more detailed explanation. They can help you cater your option trading to your needs.
Many investors purchase annuities as retirement-income insurance. This type of investment is a contract between the investor, or annuitant, and an insurance company. Once you contribute your money to an annuity, the insurance company promises to pay you a specific amount of money on a fixed basis for a fixed period of time. These investments usually penalize investors if they withdraw the money early, and tax laws generally encourage investors to postpone withdrawal until a certain age. However, there are usually provisions in place for qualified purchases, so read your contract thoroughly prior to investing.
Cryptocurrency is a fairly new option for investing, but can be extremely risky if you aren’t careful. The most popular cryptocurrency is Bitcoin, and you may remember the huge increase it had a few years back, but there are plenty of other cryptocurrencies out there as well. While cryptocurrency can make you a great deal of money and even be used as true currency at some retailers, they often have wild fluctuations, so make a research-based decision when considering investing in crypto.
Commodities are actually products you can invest in, such as metals, agricultural products, livestock, and energy. This type of investment is high-risk because the price of a certain commodity can move up and down abruptly. For example, political actions and orders can significantly change the value of things such as oil. Other sudden events can also occur, like catastrophic weather events, foreign events, and inflation. Those who invest in commodities are usually aiming to profit from supply and demand, or are trying to diversify their investment portfolio. If you are interested in commodity trading, talk to a financial professional about your best investment and the rules and regulations.
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Now that you know the basics of your investing options, you can make an educated decision about your investment future. If you are just getting started or need additional information, speak to a Carty & Co financial professional. We are here to help you make the best decision for you and your financial future.
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