Type of Investments to Learn

If you a complete newbie in the investment world, this is a short overview of investment types. Learn about advantages and disadvantages of each investment type. Then go to the next learning step.

Money Market Account

• An interest-bearing account at a bank or credit union
• Tend to pay higher interest than savings accounts but not much
• Many have check writing and debit card privileges
• Tighter restriction on number of transactions per month vs. savings accounts
• Good place to put money you plan to spend within the next year

PROS: Higher interest rates than savings accounts, FDIC insured

CONS: Restrictions on number of transactions per month,

Potentially higher fees and minimum balance requirements,

Higher return than savings accounts, but still really low interest rates,

You’re still losing money vs. inflation

CDs - Certificate of Deposit

• Offered by banks and credit unions; typically carry terms from three months to a year, and up to 5 years
• Pay higher interest than savings and money market accounts––usually, the longer the term, the higher the interest
• Surrender higher interest if money is withdrawn from account before term ends

PROS: Higher interest rates than savings accounts or money market accounts

CONS: Money is locked up for a specified amount of time

Penalties if money is withdrawn early

Still losing money vs. inflation

Bonds

• Offering their debt gives the company or government cash upfront to finance new projects like building schools or factories
• Interest is typically set when bonds are issued and paid at intervals— monthly or quarterly—on principal amount invested
• Principal amount is returned to the investor at end of term
• Potential loss of principal and interest if company has financial trouble and can’t pay its debts
• Potential loss of value if prevailing interest rates rise, making bonds’ set rates less attractive to investors

PROS: Typically, higher returns than savings and similar cash accounts

Predictability of returns

Smaller near-term price fluctuations than stocks

CONS: Generally lower returns than stocks

Risk of default on debt payments for corporate bonds

Risk of inflation and rising interest rates for government bonds

Real Estate

• Can require substantial initial and continuing investment to buy houses, apartments or land to rent out
• Value of residential, commercial and industrial property tends to rise over time
• Price movements may not be closely correlated to the stock market, providing opportunity to diversify your investments
• Potential for steady and rising income

PROS: Historically rising prices

Potential for steady and rising income

CONS: Big initial investment

Have to pay for ongoing maintenance and taxes

Mutual Funds

• Mutual funds are pools of assets (like stocks) managed by professional investors according to each funds’ stated objectives
• Fees and expenses that investors pay to be in the fund tend to be reasonable
• Investors buy shares from the fund company through their distribution channels including brokers
• Highly regulated to ensure investors’ assets are invested as stated and are available to investors when needed
• Because various types of funds rise at different rates in any year, they need to be rebalanced in your portfolio periodically
• Percentage of your total assets invested in each mutual fund needs to be adjusted and in line with your financial goals and risk tolerance

PROS: Professionally managed

Many fund choices covering nearly every area of markets, economy and world

Well-regulated and safe

Suited for building a diversified portfolio tailored to an investor’s financial goals and risk tolerance

CONS: Generally lower returns than stocks

Require monitoring

Fund performance is dependent on which part of the market it invests in and the fund manager’s ability to make wise investment choices

Stocks

• Stocks allow you to own a small portion of a company
• Stocks are issued by companies to raise capital; that capital is used to expand operations or other purposes
• Require acceptance of price fluctuations and risk management

PROS: Higher potential return than mutual funds

Little to no fees to trade, depending on your broker

You’re not tied to any stocks you buy for a specific amount of time—you can sell them any time the market is open

Allow you full control over your investing

CONS: Stock prices can fluctuate more than mutual funds and bonds

Need to manage your risk and keep losses small

Requires time to actively invest for yourself

ETFs

• Stands for ”Exchange Traded Funds”—trade like stocks but let you invest in a basket of different stocks, commodities or other assets
• The most popular ETFs are index funds, which allow you to buy a “share” of every single stock on a stock index like the Nasdaq or S&P 500
• Commodity ETFs let you easily invest in assets like gold or oil without having to physically own them
• Sector ETFs allow you to invest in many companies in a similar industry, like tech companies or banks
• Thematic ETFs allow you to invest in companies with a similar theme, like Artificial Intelligence or Legal Cannabis
• Some ETFs are leveraged, meaning they move double or triple the price of the underlying asset

PROS: Easy to invest in many assets with a single trade

Don’t require you to own the underlying asset—just a share of it

Can buy and sell ETFs easily and quickly, just like a stock

Allow you to invest in stocks without the single stock risk

CONS: Returns for many ETFs are lower than individual stocks making big moves

Companies that manage ETFs take a small fee

Leveraged ETFs can be highly volatile at times

Cryptocurrency

Bitcoin, Ethereum and other coins

• Cryptocurrency is digital money
• No physical currency or coins exist—it’s all on computers
• Sophisticated computer programs based on blockchain technology keep cryptocurrency safe from counterfeiting and theft (presumably)
• A relatively new asset class where fear, rumor and social media attention can lead to big prices swings
• Cryptocurrency is traded 24/7 around the world
• Expected to resist effects of inflation and decline in value of the dollar
• Prices have fluctuated wildly

PROS: Counterfeiting is impossible

High level of privacy

CONS: High volatility can lead to quick, unexpected losses. Many people have lost almost entire investment in crypto.

Highly speculative, as there is no basis for evaluating its “true value” like there is with assets like dollars or gold

Scams and security breaches have been known to happen, so exercise caution

Options

Give the buyer the right to buy or sell an underlying asset, like a stock, at a stated price by a certain date

• Standard option contract covers the rights to 100 shares of a stock for a much lower price than actually buying the stock
• They allow investors to take advantage of convictions they have about future events in the investment markets
• Options also allow investors to protect, or hedge, their investments as concerns of increasing risk arise
• They allow investors to have access to a stock they think could soon rise or fall significantly but could face volatility due to an impending earnings report or other corporate event

Learn more about options trading on IBD's infographics page.

PROS: Options give investors added tools to augment and fine-tune their exposure to the markets

Allow investors to bet on a price move for less than the cost of actually buying the stock

CONS: Require a lot of knowledge and sophistication to do well

Options have MUCH larger price swings than stocks

Easy to lose 100% of your investment

THE SWEET SPOT: STOCKS AND ETFs

I believe that stocks and ETFs (beyond other investments I like) offer the best balance of potential risk and reward. The stock market is open to everyone who wants to invest for themselves and make their money work for them.

• Easy to get started
• Doesn’t require a lot of money unlike, for example, real estate
• Stock indexes have a higher rate of return over time than CDs, bonds, money market accounts and mutual funds
• Stocks carry less risk than highly volatile investments like options and cryptocurrency, which can be dangerous for beginners
• Reinvesting the gains and dividends made from stocks makes for exponential growth over time
• The key: Start small and let success build on success!

Key Points

1 There are many different types of assets you can invest your money in. They can vary from very safe and low return (CDs, money market accounts) to highly volatile and speculative (cryptocurrency and options).

2 Stocks and ETFs offer the best balance of risk and reward. Also, I recommend reading about CEFs and Preferred Stocks that are part of my portfolio.

3 Educating yourself before investing in any asset is the most important step to take.

Note: Thanks to IBD for providing these tips.

Best in your journey into investment world.

Your Admin.