Growing up, we’ve all heard adults talking about type of investment and how they’re a great idea for everyone. They would go on and on about the countless benefits of investing. But as the years passed and technology advanced, we sort of lost track of the latest investment opportunities and, to be honest, where to even begin.
Speaking of technology, it’s actually what created a new generation of millionaires in the 21st century. New money families make big profits investing in technology-driven businesses and online stocks. As you can see, the 21st century (or the modern era for that matter) made investing accessible to newcomers and even unconventional investors. There are now tons of discount online investment companies and free-trading apps flooding the market.
We get it, though. Investing can be intimidating. With so many options of best investments apps and guide available today, it’s hard to figure out which types of investments are right for your portfolio. But that’s why we’re here today, helping you navigate the world of investing.
Here comes one of the big questions we’ll tackle in this article (although we’re pretty sure there’s an even bigger question lurking that we’ll dive into later): What exactly is investing? Well, technically speaking, investing involves allocating resources to something with the goal of generating income or making a profit. In easy-to-understand language, investing is putting your money to work for a certain period of time on some kind of project or venture, all in the hopes of getting back more money than you initially put in. It’s about allocating your resources, usually your hard-earned cash, with the expectation of making some good returns—whether it’s through income, profits, or gains.
Now, when it comes to investing, there are all sorts of things you can put your money into, either directly or indirectly. You could use your funds to start a business, or you could invest in assets like real estate, aiming to generate rental income or sell them at a higher price in the future.
The thing is, investing is different from saving (which we will discuss in more detail later). When you save money, you’re just stashing it away for safekeeping, while investing involves taking risks. When you invest, there’s always a chance that the projects or ventures you put your money into might fail, and you might lose money. Investing also sets itself apart from speculation, where speculators make bets on short-term price fluctuations without really putting their money to work in a productive way.
Investing Instead of Saving
Put simply, saving is all about storing your hard-earned cash for the future. It’s like a safety net, with no risk involved. You’re just hoarding that money, knowing it’ll be there when you need it. Meanwhile, investing is like taking that money and putting it to work, aiming for substantial gains in the future. But investing entails some risk. The potential for loss is always lurking around the corner.
Let’s say you’re saving up for a down payment on a home. Many experts would advise you to park that cash in a safe and secure investment vehicle. Clearly, saving is our way of playing it safe. But when investing, you need to weigh the risks.You need to consider what would happen if you lost some of that money and how it would impact your future plans.
Here’s where things get interesting. Saving and investing are often mutually beneficial. They both aim to increase your wealth over time. But there are some key differences. For example, certain savings accounts are backed by federal insurance coverage. That kind of guarantee is not always present when it comes to investing.
This begs the question of why investing is better than saving. Well, when you invest, you’re not just letting your money sit idle. You’re, like mentioned before, putting it to work. Let’s say you invest in stocks or bonds. Your capital is in the hands of a skilled management team, working hard to make it grow. Sure, there’s some risk involved, but that risk comes with the potential for capital gains, dividends, and interest flows. Cash, on the other hand, sits there collecting dust while inflation slowly eats away at its value over time (yikes!).
Understanding Different Types of Investments
When you do a quick Google search for ‘type of investment’, you’re bound to come across a plethora of different options. Here, we’ll break them down into 7 common categories and explain them in the most beginner-friendly way possible for you to decide which type of investment is best for you.
Whoever said you needed millions to own a business clearly didn’t know about stocks. This type of investment is actually quite simple, if not the simplest. When you buy stocks, you’re essentially becoming a partial owner of a company. And as an owner of a company’s stock, also called a shareholder, you get to ride the wave of its growth and success. If the stock price rises, you as an investor can trade it for a profit. Plus, you might even get regular dividends, which are like a piece of the company’s profits shared with you.
Now, don’t get too starry-eyed just yet. While you have the chance to own shares of big shots like Exxon, Apple, or Microsoft, it’s not as simple as crossing your fingers and waiting for the price to rise. There’s always a little risk involved. See, the stock price could actually go down, meaning you could lose money instead of gaining it.
Broadly speaking, bonds represent debt obligations issued by entities such as governments, municipalities, and corporations. So, when you buy a bond, you’re basically lending money to one of these entities. In return, you become a proud owner of a share of their debt. But it’s not all one-sided. You’ll also receive periodic interest payments along the way, as well as having the option to wait until the bond matures.
As for a bond’s maturity, to be more specific, it’s basically the point at which you’ve held the bond for the agreed-upon period of time, and you become eligible to cash in and get your initial investment back.
Now, let’s compare bonds and stocks, which in fact, are both common investment options with some key differences. Bonds usually offer lower returns compared to stocks, but they also tend to be less risky. Keep in mind that the emphasis is on ‘less risky’, because, as always, there’s still some risk involved. The company or entity you bought the bond from could go under, or the government might default. However, if you’re looking for a safe bet, you can always count on treasury bonds, notes, and bills. Those are considered to be pretty safe investments (Still, not totally risk-free).
To begin, let’s first discuss the word ‘funds’. Funds are terrific investment tools managed by professionals called investment managers. They let you invest your money in a variety of assets like stocks, bonds, preferred shares, commodities, and more. Two popular types of funds are mutual funds and exchange-traded funds (ETFs). But let’s save the ETF talk for later and focus on mutual funds for now.
So, for those of you who don’t know, when a number of investors join forces and invest their money in a variety of companies, that pool of money is called a mutual fund. Now, these funds can be managed in two ways: actively or passively. In an actively managed fund, you’ve got a fund manager who’s all hands-on, picking and choosing which securities to invest in, aiming to beat a designated market index. As another option, a passively managed fund, also known as an index fund, simply tracks a major stock market index, like the Dow Jones Industrial Average. You could say this approach is more or less like going with the flow and following the trends.
With this type of investment, you make money when the value of the stocks, bonds, and other bundled securities they invest in goes up. There are two ways to buy these funds, directly from the managing firm or through discount brokerages. Just keep in mind that there’s usually a minimum investment requirement and sometimes an annual fee. Now, mutual funds do come with their own set of risks, similar to stocks and bonds, depending on what they’re invested in. However, the risk is often lower because these funds are inherently diversified. They spread their investments across different assets to reduce the impact of any one investment going sour.
Exchange-Traded Funds (ETFs)
As we’ve mentioned earlier, Exchange-traded funds (ETFs) are another common type of funds. These funds are actually pretty similar to mutual funds (aka its twin brother), yet they differ in a few ways. Instead of going through a fund company like mutual funds, ETFs are purchased and sold on the stock market. One neat thing about ETFs is that their price fluctuates throughout the trading day. While mutual funds have a set value at the end of each trading session.
ETFs make money by collecting returns from all the investments they hold. They’re often recommended to new investors because they provide more diversification compared to investing in individual stocks. You can minimise risk even further by choosing an ETF that tracks a broad index. So, you can get a taste of different stocks without putting all your eggs in one basket. And just like mutual funds, you can make some great money from ETFs by selling them when their value goes up.
Certificates of Deposit (CDs)
The following is one of the safest and lowest-risk investment options in today’s article: certificates of deposit (CDs). The way it works is pretty simple. You hand over a certain amount of money to a bank for a set period of time, and in return, you earn some interest on that money. Once that time is up, you get your initial investment back, along with the interest you earned. The most important concept here is that the longer you’re willing to let the bank hold onto your money, the higher the interest rate they’ll give you. But in all honesty, while they are super safe investments, the potential return isn’t going to make you a millionaire overnight. This option is, without a doubt, suitable for those who enjoy slow and steady growth.
So, how do you make money from CDs? Well, it’s all about the interest you earn during the deposit’s term. CDs are great for long-term savings goals because, as in our previous explanation, they come with minimal risks. In the unfortunate event that your financial institution filed for bankruptcy, your money will still be protected. However, make sure you won’t be needing that money before the CD matures because there are hefty penalties for early withdrawals. Once the money has been locked away, it is best to let it sit until the term has expired.
What’s smarter than looking out for your future? That’s where retirement plans step in. Think of them as your ultimate investment accounts with some tax benefits, all geared towards securing your golden years. This type of investment plays the role of a superhero in the investment world, specifically designed to help you save up for retirement.
There are a variety of different retirement plans out there, but let’s focus on two popular ones: workplace retirement plans and individual retirement plans (IRAs). Workplace retirement plans, as many of you have already figured out, are sponsored by an employer. Alternatively, if you don’t have access to an employer-sponsored plan, you can go for an individual retirement plan, or IRA, or even a Roth IRA if you want some extra perks.
It’s time to wrap up our investment journey with the final player on our list: commodities. This type of investment is one that involves the physical products you can actually get your hands on. We’re talking about supplies like gold, silver, copper, wheat, corn, soybeans, pork bellies (we kid you not, they fall under the livestock category), and even crude oil and natural gas.
Usually, you’ll find these investments trading on the futures markets. That’s where the pros, the producers, and the commercial buyers gather to hedge their operations.
Before you jump headfirst into the commodities market, take a moment to really understand how futures work. Trust us, it’s not a walk in the park. Commodities investing comes with its fair share of risks. Prices can swing like Tarzan on a vine due to sudden events. One minute, political actions can send the price of oil through the roof. Next, the weather can wreak havoc on the value of agricultural products and wipe out your investment.
If you are still interested, one of the primary methods for you to make money out of this type of investment is through trading commodity futures. Some investors even buy commodities as a hedge for their portfolios during times of inflation. You can also get in on commodities indirectly. Think of stocks, mutual funds, ETFs, and futures contracts.
Best Type of Investment for Beginners in 2023
If we have to suggest the type of investment best suited for beginners, we have to say that it really depends on several factors, which include your goals, risk tolerance, and financial situation. However, let’s give you a general idea of what could work for many beginners in 2023 (perhaps even in future years):
Let’s start with a Roth IRA, which is arguably a smart way to save for later life. You invest after taxes, but the real reward is that in retirement the growth and withdrawals are tax-free. Those are some great long-term benefits that can be achieved. And don’t forget to do your homework and find a reputable brokerage or financial institution to open your Roth IRA account.
If you’re not interested in doing a lot of research on individual investing, you may want to consider passively managed mutual funds (sometimes referred to as index funds) as one of your options they’re an easy option which can make your life a little easier. When you feel a little more confident, then dip your toes in the bank. It can be a wild ride with potential for great returns, but, as we’ve said countless times, it comes with a lot of risk.
Once you’ve developed some knowledge and interest in individual stocks, allocate a portion of your budget to invest directly in companies you trust as an alternative to looking at low-cost exchange-traded funds (ETFs) in order to expose yourself to the broader market or a specific segment per.
Remember that the above plan we gave you is just an example. It’s important to do your own research, and if you’re serious about it, consult a financial adviser who can offer tailored advice based on your circumstances and goals. And as a beginner, you need to educate yourself about investing, understand the risks, and develop a long-term strategy.
The amount you need to invest varies depending on the type of investment and your personal financial situation and goals. Lucky enough, though, more investment options have lowered their minimum requirements, allowing more people to partake.
As for final thoughts, no matter what route you choose or whether you are going to find a particular property, it is important to do a thorough search, ally. That means understanding the fundamentals of what you’re investing in, knowing what type of investment risk is involved, and checking the credibility and track record of your investment manager or platform manager. As the wise Warren Buffett says, ‘Never invest in a business you can’t understand’. So, make sure you have the knowledge and understanding before investing your hard earned money in any investment opportunity.