If you don’t like the idea of leaving your savings to gather dust in a savings account, then you may be tempted to try your hand at investing – but there are so many different ways to invest that it can be overwhelming.
So, here is a guide to all the different types of investments including how they work and what risks they each come with. Check them out and hopefully, you will find the best type of investments for you.
The Different Types Of Investments
Stocks
Stocks are the most well known type of investment because it’s also one of the easiest to understand. Investing in stocks means that you are basically purchasing an ownership stake in a company.
These companies can range from huge well known brands such as Apple all the way down to lesser known names.
When you buy a stock, you are hoping the share increases in price as the company becomes more successful so you can sell it on for a profit.
The risk with stocks is that you can lose money. Sometimes, the cost of a share will dip and you may be forced to sell it for a lower price than what you bought it for.
So, stocks can be risky but you can also pay for shares that literally cost a few dollars – so it’s up to you how much you want to risk.
Bonds
Bonds work differently to stocks although some people can get the two confused. With stocks, you are buying an ownership stake but with bonds, you are only lending money to a company or business.
These companies and businesses will then have to pay an interest on the payments they make and once the bond matures, you will be given back the principle.
The rate of return is much lower for bonds than it is for stocks but they are also less risky, and thus you are less likely to actually lose money. This means that bonds are one of the safest types of investments out there.
Certificates of Deposit
Certificates of deposit (shorted to CD) is another type of low risk investment that is also pretty popular.
This is because you are basically giving your bank your money and after a set amount of time, the bank will give you that principal back with an added amount on top to cover the interest.
The longer you lend your money to the bank, the higher you will earn through interest.
The reason why this type of investment is so popular is because you are insured up to $250,000 so even if the bank you lent your money to collapsed, you will still have your money back.
There is one drawback with CDs however and that is if you want the money back sooner (either for emergencies or any other reason) you will be forced to pay major penalties which can lose you money.
So, make sure that you will absolutely not need that money until the bank pays it back to you at the predetermined date.
Options
Options are a more risky type of investment that works similarly to stocks but is much more complex. Buying an option gives you the ability to buy or sell that asset at a certain time for a certain price.
Options come in different types themselves but the two main types are call options (for buying) and put options (for selling).
Once you buy an option, you have locked in the price. The value of that asset can then go up or down and, depending on whether or not you are buying or selling the option, you can earn a profit or lose money.
Options are typically a little more tricky for people to understand and with the additional risks, they’re not the best method to use if you are trying to safely earn a profit on your savings (can you save enough to become a millionaire? Find out here).
Retirement
Yes, saving for retirement does count as a type of investment!
This is because there are lots of different retirement plans and options out there for you including 401(k) and 403(b) plans. You can also get an individual retirement plan (shortened to IRA).
These plans can be used as a vehicle to help you buy stocks and bonds by investing pre tax dollars and then allowing you to withdraw money without paying tax.
However, the risks remain the same as they do with buying stocks and bonds outside of using retirement plans – but people also don’t like the idea of gambling with their retirement money, so it’s up to you if you would rather keep your investment funds and retirement savings separate.
Cryptocurrency
The new kid on the block is cryptocurrency but don’t get swept up in this trend just yet.
Cryptocurrencies are wildly unreliable and fluctuate all the time – making them super risky investments as it’s highly likely you could end up losing a fortune. However, with great risks come great rewards.
This is because cryptocurrencies are digital currencies that do not have government backing, so they’re not tied to the price of gold for example. This is what allows them to fluctuate so much and potentially earn a huge profit on just luck alone – or lose it.
Cryptocurrencies are still pretty new and no one is certain if they’ll stick around in ten, twenty years. So, the future is still uncertain for cryptocurrencies – making them a super risky long term investment.
Commodities
Investing in commodities means that you are investing in the markets that buy and sell actual physical products such as food produce, precious metals, and sources of energy.
However, investing in commodities can be just as unpredictable as investing in something like cryptocurrencies.
This is because bad weather can impact agricultural produce, or political actions or boycotts can impact the value of energies or metals.
This means that a sudden event can quickly change the value of your investments, either losing or gaining you money in a short amount of time.
Conclusion
As you can see, there are lots of different types of investments. Some are riskier than others, but those with greater risks also have the higher rewards. So, think carefully about what you want to invest in and good luck!