There are many different types of investment options, so how do you decide which one is right for you? It’s important to understand the risks and rewards of each before making a final decision. Here are the most common types of investment options:
Stocks: Stocks, also known as equities, are a type of investment in which an investor purchases a stake in a publicly traded company. The idea behind this investment is that the price of the company will rise, ultimately allowing the investor to make a profit. The stock can fall in value as well, so be sure to plan accordingly. Investing in stocks can also be risky. While they can yield high returns, stocks can also have huge risks.
Cash equivalents: These types of investments have the highest liquidity. Unlike stocks, cash does not fluctuate in value. They are ideal for retirement savings because they pay interest without exposing the investor to the risk of losing the principal. Cash equivalents are generally low-risk. Some of the best known types of cash equivalents are bank CDs and corporate commercial papers. Another common type of cash equivalents is money-market instruments.
Managed funds: Mutual funds, managed funds, and other investment vehicles that manage a portfolio purchase a certain number of stocks or other investments. Managed funds are a good example. Managed funds can use foreign currency to protect their investments. And while you may not directly buy indexes, you can invest in exchange-traded funds that mimic the performance of an index. These types of investments enable investors to invest in broad market segments, or even the entire market.
Alternatives: There are many different types of investments. Most people think of traditional investments such as stocks, bonds, and cash. There are also alternative assets, which include stocks, bonds, and other asset classes that are not easily converted into cash. These types of investments are often referred to as alternative assets, and they are often risky. This is because they are not guaranteed to generate a profit and are subject to risks. However, the risks involved are much lower than traditional investments.
Mutual funds: In addition to stock and bond funds, mutual funds also offer options for retirement investing. Mutual funds pool money from many investors and invest it in a portfolio. Mutual funds offer lower costs than individual investors can achieve by investing in the market themselves. Some funds even have index ETFs. Bond funds invest in municipal and corporate bonds, which provide interest income. But what about ETFs? How do they work? In short, ETFs are like mutual funds, except that they are not backed by any company or security.
Some types of investments require more knowledge than others. Individual stocks, for example, require an investor to learn about the company, its products, and its industry. They also require knowledge of the company’s finances, as well as the competitive landscape. Many people do not have the time to devote to this process. For that reason, they typically choose a more conventional investment. This type of investment is not suitable for those with short-term needs.