10 Common Types of Investments and How They Work

Investing can intimidate many people because there are several options, and it can be difficult to figure out which investments are right for your portfolio. This guide tells you 10 of the most common types of investments, from stocks to cryptocurrency, and explains why you should want to consider including everyone in your portfolio.

If you are serious about investing, it may be worth finding a financial advisor to guide you and help you figure out which investments can help you meet your financial goals.

10 Types of Investments

1. Stocks

Stocks, also known as equities or shares, might be the most well-known and easy types of investments. When you buy shares, you buy ownership of a publicly traded company. Most of the biggest companies in the country are publicly traded, meaning you can buy stock in them.

How You Can Make Money: When you buy a stock, you expect the price to go up, so you can sell it for a profit. Of course, there is a risk that the stock price could go down, in which case you would lose money.

2. Bonds

When you buy a bond, you are virtually lending money to an entity. Usually, this is a business or government entity. Companies issue corporate bonds, while local governments issue municipal bonds. The U.S. Treasury issues Treasury bonds, notes, and bills, which are all debt instruments that investors buy.

How you can earn money: When money is being lent, the lender receives an interest payment. After the bond matures, that is, you have held it for the amount of time set by the contract, and you get your principal back.

The rate of return for bonds is generally much lower than for stocks, but bonds also carry less risk. Of course, there are still a few risks involved. The company you buy the bond from may fold, or the government may default. Treasury bonds, bills, and notes, however, are considered very safe investments.

3. Mutual Funds

A mutual fund is a pool of money from multiple investors that is broadly invested in multiple companies. Mutual funds are either actively managed or passively managed. An actively managed fund has a fund manager who chooses the securities in which investors’ money is invested. Fund managers often seek to beat a specified market index by selecting investments that will outperform such an index.

A passively managed fund, also known as an index fund, simply tracks a major stock market index such as the Dow Jones Industrial Average or the S&P 500. Mutual funds can invest in a wide range of securities: equities, bonds, commodities, currencies, and derivatives.

Mutual funds carry numerous of the same risks as stocks and bonds, depending on what they’re invested in. However, the risk is often lower because the investments are inherently diversified.

How You Can Make Money: Investors make money from mutual funds when the value of stocks, bonds, and other bundled securities rises. You can buy them directly from the management firm and through discount brokerages. But note that there’s usually a minimum investment and you’ll pay an annual fee.

4. Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are the same as mutual funds in that they are a collection of investments that track a market index. Unlike mutual funds, which are purchased by a fund company, ETF shares are bought and sold on stock exchanges. Their price fluctuates throughout the trading day, whereas the value of a mutual fund is simply the Net Asset Value of your investment, that is calculated at the end of each trading session.

How You Can Make Money: ETFs are often recommended to new investors because they are much more diversified than individual stocks. You can further reduce risk by choosing an ETF that tracks a broad index, and like mutual funds, you can earn money from ETFs by selling them when they grow in value.

5. Certificates of Deposit (CDs)

Certificates of Deposit (CDs) are extremely low-risk investments. You lend a certain amount of money to a bank for a certain period of time. When that time period is over, you get your principal back and a predetermined interest. The longer the loan term, the higher your interest rate.

How You Can Make Money: CDs are great long-term investments for saving money. There’s no big risk because they’re FDIC-insured up to $250,000, which will cover your money even if your bank goes bankrupt. That said, you must be sure that you will not need the money during the term of the CD, as there are general penalties for early withdrawals.

6. Retirement Plans

There are many types of retirement plans. Workplace retirement plans sponsored through your employer include 401(k) plans and 403(b) plans. If you don’t have access to a retirement plan, you can get an Individual Retirement Plan (IRA), either traditional or Roth.

How you can make money: Retirement plans are not a separate category of investment, but a means of buying stocks, bonds, and funds in two tax-advantaged ways. The first allows you to invest pre-tax dollars (like a traditional IRA). Second, it allows you to withdraw money without paying taxes on that money. The risks to investing are the same as if you were buying investments outside of a retirement plan.

7. Options

An option is a little more complicated way to buy a stock. When you buy an option, you are buying the ability to buy or sell an asset at a specified price at a specified time. There’re two types of options – call options to buy assets, and put options to sell assets.

How You Can Make Money: Like an investor, you lock in the price of a stock with the hope that it’ll go up in value. However, the risk of an option is that the stock may also lose money. So if the stock declines from its opening price, you lose the contract money. Options are an advanced investment technique and retailers should exercise caution before utilizing them.

8. Annuities

Most people use annuities as part of their retirement savings plan. When you buy an annuity, you buy an insurance policy and in return, you get periodic payments.

Annuities come in many varieties. They can last until death or for a set period of time. Periodic premium payments or only an upfront payment may be required. They may be partially linked to the stock market or they may simply be an insurance policy with no direct link to the markets. Payment can be immediate or deferred till a specified date. They can be fixed or variable.

How You Can Make Money: Annuities can guarantee an additional source of income for retirement. But while they’re fairly low risk, they are not high growth. So investors find them a good complement to their retirement savings rather than an integral source of wealth.

9. Cryptocurrencies

Cryptocurrency is a completely new investment option. Bitcoin is the most well-known cryptocurrency, but there are countless others, like Ethereum and Litecoin. These are digital currencies that have no government backing. You can buy and sell virtual on cryptocurrency exchanges. Some retailers will even allow you to make purchases from them.

How You Can Make Money: Crypto often fluctuates wildly, making it a very risky investment. However, a few investors use them as alternative investments to diversify their portfolios beyond stocks and bonds. They are available on cryptocurrency exchanges.

10. Commodities

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

Retail investors should ensure that they understand futures thoroughly before investing in them. In part, this is because investing in commodities carries the risk that the price of a commodity will move rapidly and suddenly in either direction due to sudden events. For example, political actions can drastically change the price of something such as oil, while weather can affect the price of agricultural products.

Here is a breakdown of the four main types of commodities:

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

How You Can Make Money: Investors sometimes buy commodities during inflation as a hedge for their portfolios. You can buy commodities through stocks and mutual funds, or indirectly through ETFs and futures contracts.

How to Buy Different Types of Investments

There are two main ways for you to buy the different types of investments that you may be interested in purchasing. All are easy to do, but only one of the two offers a service that is completely done for you. There are two ways to buy the type of investment you want:

  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 make all the final financial decisions yourself.
  2. Hire a financial advisor: Another way to buy a variety of investments is to hire a financial advisor. Not only can an advisor facilitate you in buying and trading assets, but they can also help you figure out an overall financial strategy and adequately prepare you for retirement. It is more of an automated process in that all you have to do is approve trades or investments, and the advisor takes care of the details.

Investing Tips

  • Sometimes it can help to have an expert in your corner when investing. Finding a qualified financial advisor is not difficult. SmartAsset’s free tool matches you with up to three financial advisors working in your area, and you can interview your advisor matches for free to decide which is right for you. If you are ready to find an advisor who can assist you achieve your financial goals.
  • If your investment pays off, you may owe capital gains tax. Use the capital gains tax calculator to find out how much you’ll pay when you sell your stocks.

The Bottom Line

There are many different types of investments to choose from. Some are perfect for beginners, while others need more experience and research. Each types of investments offers a different level of reward and risk, giving you one or two good options no matter what your goals. Investors should consider each type of investment before deciding on an asset allocation that aligns with their overall financial goals.

Read Also: How To Invest in NFTs: NFT Investing Explained

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