What can I invest in? An overview of assets
- People invest in the hope of attaining a future profit.
- You can invest in stocks, bonds, ETFs, real estate, and more.
- Generally, the greater your potential return, the riskier your investment.
Investing is the act of purchasing an asset in the hopes that it will deliver some future profit. The idea is to “make your money work for you.”
Investing is like sending a climbing team up a mountain…
There are many paths on a mountain. Some are shorter and steeper, while others are longer and well trodden. In some cases, a path may lead nowhere at all, or even take you on a dangerous detour. Every path—and every investment—comes with some degree of risk. But with planning and a calculated strategy, your summit attempt has the potential to be rewarding.
Choosing your investments is a balance between risk and return. In general, the higher your potential return, the riskier your investment.
What are some of the risks associated with investing?
Just as a climber on your team may slip or fall, every investment comes with some risk. Your assets may increase or decrease in value, and there’s a chance the underlying companies or institutions may default or go bankrupt. Typically, these are more extreme circumstances.
Remember though, you can choose to send all your climbers up the same route, or you can divide your team among different routes (i.e., diversify your investments).
What kinds of investment accounts can I choose from?
There are many types of investment accounts. Here are a few of the most common:
Individual Brokerage Account
A brokerage account allows individual investors to invest in stocks, bonds, exchange-traded funds (ETFs), and mutual funds.
A retirement account can help a person prepare for when they’re old and gray. Just like it sounds, these accounts help gather savings and investments for retirement — and they usually come with some sort of tax benefit (e.g., depending on your exact account type, investment returns might be tax-deferred or even in some limited cases tax-free). Remember though, there are often restrictions and/or penalties for taking withdrawals before you reach retirement age.
What kind of assets can I invest in?
When you’re ready to invest, it’s helpful to get a lay of the land. Here are some of the most popular types of assets.
Cash and Cash Equivalents
Wait a second! This isn’t about keeping your hard-earned dollars under your mattress. Instead, it’s about how you balance your short-term money between different accounts — for many people, this might include a checking account and savings account (plus, the cold, hard cash in their wallets). Beyond these conventional allocations of short-term money, many people are also starting to turn to higher yielding accounts, which may allow them to earn slightly more interest on their deposits. Some banks offer high-yield savings accounts, with higher-than-usual interest rates (hence, high-yield). Still, these interest rates can rise and fall given their correlation with the federal funds rate.
You might also choose to keep your cash in a certificate of deposit (CD). This is another type of savings account, which offers a higher interest rate than a regular savings account. However, in exchange for their higher interest rates, CDs have pretty strict rules on when you can withdraw the money (Hint: usually at the end of the term, or perhaps by paying a penalty for early withdrawal).
A stock is a unit of ownership in a company, and it represents a piece of a company’s assets and revenue. For many people, investing in the stock market is key to building wealth.
Still, investing in stocks can be pretty volatile — Your assets may swiftly increase or decrease in value. Many factors can influence a company’s stock price, ranging from the company’s production and supply chain to big, global economic events and general investor sentiment.
One way to potentially cushion against volatility is to invest in funds that bundle different assets, possibly helping with diversification. This is what some exchange-traded funds (ETFs) and mutual funds do. ETFs often track an index, such as the S&P 500. Mutual funds are similar to ETFs, but they can only be traded once per day.
A bond is like an IOU issued by a company, government, or institution in exchange for cash. In exchange for providing one of these entities with a loan, a bonds buyer is slated to receive a specified payment (aka a coupon) at a fixed interval. Like stocks, most bonds are tradable in financial markets.
There are different kinds of bonds. The federal government issues Treasury bonds, while individual cities or locales may issue municipal bonds. Companies issue bonds known as corporate bonds.
For investors, bonds are generally considered less risky than stocks — that’s because companies must generally satisfy their obligations to bondholders before stockholders. Additionally, interest payments on bonds are usually considered more consistent than profits or capital gains, which may rely on a company’s performance. Furthermore, it’s widely considered very unlikely that large, stable institutions, like the US government, would default on their financial obligations.
Purchasing property, such as a home, is often viewed as a relatively stable investment, especially in light of the housing shortage in the US. Regardless of the rise or fall in the property’s market value, you typically may benefit from living in it (or perhaps renting it out to someone else). Those who can’t afford a down payment or mortgage but want to invest in real estate may invest in financial vehicles called real estatement investment trusts (REITs). These are companies that own, operate, and seek to profit from real estate properties. Owning a piece of them is one way of sharing in that business.
Commodities are physical goods like gold, oil, beef, and orange juice.
Commodities trading is generally considered the domain of advanced traders, who are well-aware of factors like the supply and demand for these goods (as well as seasonal trends). Here’s one example, specific to the oil industry: An agreement between the OPEC countries may limit oil production, and that might lift the price of oil — these can be complicated markets with many underlying dynamics to consider.
Cryptocurrencies are digital assets used for investment or payments. Usually, they are not backed by any government or central bank, and their transactions are recorded on a blockchain.
Although cryptocurrencies are not considered legal tender, sanctioned by a government, they may often be traded like currencies in a foreign exchange market. A word of caution: Since their inception in 2009 and beyond, cryptocurrencies have been an extremely volatile asset. Bitcoin, for example, has experienced sudden spikes and declines in recent years.
There are also non-financial assets. Some of these investments include memorabilia, collectors’ items, and fine art. Examples include sports jerseys, rare stamps, and Banksy artwork. These portfolios often take time to build up, and they may require a keen eye and a deep knowledge of their associated market. Without them, it’s very difficult for the layman to tell whether a piece of art or a collector’s item is more likely to appreciate in value.
How can a person get started with investing?
Investing is all about figuring out how much work you’re willing to do and how much risk you’re willing to shoulder. As a general principle, younger investors might take on more risk because they have a longer time horizon to potentially recoup losses.
Once you’ve determined your risk tolerance and goals when it comes to investing, you may consider sending some of your money up the mountain on one or more of the paths outlined above, in hopes that they reach the peak.
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Diversification does not ensure a profit or protect against losses in declining markets
Dividends can be terminated or reduced without notice for various reasons.
This is a general description of common investments available today and as such cannot completely describe all risks and considerations and some may not be appropriate for novice or even experienced individual investors. You should carefully research and consider all risks, and costs before you invest.
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