types of investments

Investing can intimidate a lot of people because there are many options and it can be hard to figure out which investments are right for your find a financial advisor who can guide you and help you figure out which investments will help you reach your goals.

1. Stocks

Stocks, also known as shares or equities, might be the most well-known and simple type of investment. When you buy stock, you’re buying an ownership stake in a publicly-traded company. Many of the biggest companies in the country are publicly traded, meaning you can buy stock in them. Some examples include Exxon, Apple and Microsoft.

How you can make money: When you buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money.

2. Bonds

When you and bills, all of which are debt instruments that investors buy.

How you can make money: While the money is being lent, the lender or investor gets interest payments. After the bond matures, meaning you’ve held it for the contractually determined amount of time, you get your principal back.

The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be a lower risk. There is still some risk involved, of course. The company you buy a bond from could fold or the government could default. Treasury bonds, notes and bills, however, are considered very safe investments.

3. Mutual Funds

A and derivatives.

Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in. The risk is often lesser, though, because the investments are inherently diversified.

How you can make money: Investors make money off mutual funds when the value of stocks, bonds and other bundled securities that the fund invests in go up. You can buy them directly through the managing firm and discount brokerages. But note there is typically a minimum investment and you’ll pay an annual fee.

4. Exchange-Traded Funds (ETFs)

the net asset value of your investments, which is calculated at the end of each trading session.

How you can make money: ETFs make money from the collection of a return amongst all of their investments. ETFs are often recommended to new investors because they’re more diversified than individual stocks. You can further minimize risk by choosing an ETF that tracks a broad index. And just like mutual funds, you can make money from an ETF by selling it as it gains value.

5. Certificates of Deposit (CDs)

A certificate of deposit (CD) is considered to be a very low-risk investment. You give a bank a certain amount of money for a predetermined amount of time and earn interest on that money. When that time period is over, you get your principal back, plus the predetermined amount of interest. The longer the loan period, the higher your interest rate is likely to be. While the risk is low, so is the potential return.

How you can make money: With a CD, you make money from the interest that you earn during the term of the deposit. CDs are good long-term investments for saving money. There are no major risks because they are FDIC-insured up to $250,000, which would cover your money even if your bank were to collapse. That said, you have to make sure you won’t need the money during the term of the CD, as there are major penalties for early withdrawals.

6. Retirement Plans

Types of Investments

A retirement plan is an investment account, with certain tax benefits, where investors invest their money for retirement. There are a number of types of retirement plans such as workplace retirement plans, sponsored by your employer, including Roth IRA.

How you can make money: Retirement plans aren’t a separate category of investment, per se, but a vehicle to buy stocks, bonds and funds in two tax-advantaged ways. The first, lets you invest pretax dollars (as with a traditional IRA). The second, allows you to withdraw money without paying taxes on that money. The risks for the investments are the same as if you were buying the investments outside of a retirement plan.

7. Options

An put options, for selling options.

How you can make money: As an investor, you lock in the price of a stock with the hope that it will go up in value. However, the risk of an option is that the stock could also lose money. So if the stock decreases from its initial price, you lose the money of the contract. Options are an advanced investing technique and retail should exercise caution before using them.

8. Annuities

When you buy an annuity, you purchase an insurance policy and, in return, you get periodic payments. These payments generally come down the road in retirement but are often purchased years in advance. This is why many people use annuities as part of their retirement savings plan.

Annuities come in or variable.

How you can make money: Annuities can guarantee an additional stream of income for retirement. But while they are fairly low risk, they aren’t high-growth. So investors tend to make them a good supplement for their retirement savings, rather than an integral source of funding.

9. Derivatives

A derivative is a financial instrument that drives its value from another asset. Similar to an annuity, it is a contract between two parties. In this case, though, the contract is an agreement to sell an asset at a specific price in the future. If the investor agrees to purchase the derivative then they are betting that the value won’t decrease. Derivatives are considered to be a more advanced investment and are typically purchased by institutional investors.

The three most common types of derivatives are:

  • Options Contracts: The options contract gives the investor the opportunity to buy or sell an asset at a specific price at a specific time in the future. Call options provide you the opportunity to buy the asset at that price and put options allow you to sell that asset.
  • Futures Contracts: Futures are contracts that commit to a sale to being made at a specified time and on a specified date.
  • Swaps: This is an agreement between two parties to exchange cash flows in the future.

How you can make money: You can make money investing in derivatives if you are on the right side of price fluctuations. For example, if you agree to buy copper at $1,000 in nine months but the market price at that time is $2,000 then you’ve essentially doubled your investment.

10. Commodities

Commodities are physical products that you can invest in. They are common in futures markets where producers and commercial buyers – in other words, professionals – seek to hedge their financial stake in the commodities.

Retail investors should make sure they thoroughly understand futures before investing in them. Partly, that’s because commodities investing runs the risk that the price of a commodity will move sharply and abruptly in either direction due to sudden events. For instance, political actions can greatly change the value of something like oil, while the weather can impact the value of agricultural products.

Here’s a breakdown of the four main types of commodities:

  • Metals: precious metals (gold and silver) and industrial metals (copper)
  • Agricultural: Wheat, corn and soybeans
  • Livestock: Pork bellies and feeder cattle
  • Energy: Crude oil, petroleum products and natural gas

How you can make money: The primary way that investors make money with commodities is by trading commodity futures. Investors sometimes buy commodities as a hedge for their portfolios during inflation. You can buy commodities indirectly through stocks and mutual funds or ETFs and futures contracts.

How to Buy Different Types of Investments

There are two main ways for you to purchase the different types of investments you may be interested in buying, though either way will require you to have an active investment account. Each is easy to do, but only one of the two provides a service that is completely done for you. The two general ways to buy the types of investments you want are:

  1. Start an Online Brokerage Account: You can elect to manage your own investments and just open a brokerage account. This enables you to get up and running quickly with the ability to buy stock, bonds, mutual funds and more in a matter of minutes. The only downside is that you’ll be making the final financial decisions all on your own.
  2. Hire a Financial Advisor: The other way to buy multiple types of investments is to hire a financial advisor. The advisor can not only provide you with access to buy and trade assets but they can also help you figure out an overall financial strategy and prepare you adequately for retirement. This is more of an automated process in that you just have to approve trades or investments and the advisor takes care of the details. Your advisor can help you get a brokerage account, as needed.

The Bottom Line

Most popular types of investments and how they work

There are a lot of different types of investment to choose from. Some are perfect for beginners, while others require more experience and research. Each type of investment offers a different level of risk and reward, giving you a good option or two no matter what your goal might be. Investors should consider each type of investment before determining an asset allocation that aligns with their overall financial goals.