What Are the Types of Investments And Which Can Give You the Highest Returns?
Investing extra funds is always a good idea. However, the investment world has changed drastically since the good old days of stocks being the only option. Nowadays, people have many investment choices - almost too many, in fact, which makes investing seem as complicated as rocket science.
Let’s simplify and briefly explain almost all types of investments available to you right now and discuss the potential risks and returns involved. Hopefully, by the end of this article, you will have found a couple of investment products to research further and maybe even earn big money on.
We’ll start with things that are the “safest” to invest in to acquaint beginners with the process. Once you are more comfortable in your investor role, you can move to more complicated options for much higher potential returns.
Before they even try their hand at the whole thing, novice investors should look into as many low-risk investments as possible and, most importantly, stick to the investment types they understand inside and out.
When people first start considering investing, cash investments such as savings accounts, certificates of deposit (CD), and individual retirement accounts (IRAs) are typically viewed as the first step.
Savings accounts are the simplest type of investment there is - you deposit your money with the bank and accrue interest on it. The rates aren’t particularly high, but this is a very stable form of investing, and you can withdraw your money at any time.
With CDs, you give the bank a certain amount of money to keep for a certain amount of time, during which you gain interest at a premium rate, but can’t freely withdraw the funds. Once your term expires, you get back your principal, plus any interest you’ve accrued.
These types of financial investments are very similar to savings accounts, but they provide higher interest rates. There are no significant risks with CD investments, either, as your money is FDIC-insured: Even if the bank were to collapse, you’d still get your money back. However, all cash investment accounts can fall victim to inflation, and it’s not advisable to withdraw the money before your term is up, as you might end up facing costly early withdrawal penalties.
If you’re looking to invest in comfortable retirement, a good IRA account might be the solution. Traditional IRAs are tax-deferred, and Roth IRAs are tax-free, meaning you can save a lot more than you would with a traditional savings account.
Like CDs, bonds are one of the most basic types of investments. These are loans investors make in organizations, corporations, or governments in exchange for bond-maturity interest. You get the bond interest through regular installments, typically once or twice a year. At the bond’s maturity date, investors get their principals back as well.
There are many different types of bonds: Treasuries, agency bonds, corporate bonds, and more; you can also invest in bond mutual funds. The types of bonds you hold determine the risk factor, but as with everything else, the lower the risk, the lower the reward - i.e., the interest rate.
Bonds are low-risk things to invest in. The main thing to fear is that the issuer can default, leaving you high and dry. Also, if you try to sell your bonds before they mature, you might lose money; as with CDs, selling off bonds pre-term will likely be costly. Bond mutual fund prices can fluctuate as well.
New investors who are struggling with picking individual bonds and stocks could benefit from mutual funds. These funds gather money from multiple investors and have a professional investment manager who invests it in bonds, stocks, or other assets.
These funds are not all the same, and there are many types of investment funds with different features. Each of these has its set strategy or invests only in a specific set of bonds or stocks. If the fund benefits from bond interest or stock dividends, it distributes a portion of these earnings to its investors. The riskiness of such an investment depends on the assets within the fund.
As an investment opportunity, mutual funds allow purchasing many diversified investments simultaneously without having to select them individually, but it comes with an annual fee.
Out of the different types of investments, stocks are the best known. Also known as shares, or equities, this is the type of investment people think of and work on understanding first. Once you buy stocks from a publicly traded company, you get an ownership stake, which allows you to participate in the company’s success if the stock price increases or through the dividends the company pays out.
The central premise of purchasing stocks is the hope that their price will go up, so you can then sell them at a profit. However, it works both ways, so the risk that a company will fail, the price drop, and you’d lose money is constant. Still, gauging and acknowledging the risks are, after all, part of any investment, by definition.
Properly selecting the company to purchase shares from is the key to a successful and profitable investment portfolio. When choosing which stocks to buy, you need to think like you’re purchasing the whole company and do your research with that in mind. Of course, bigger investments face bigger potential losses, but also bigger dividends.
The research and estimation of different types of stocks can be difficult for beginners, so it might be helpful to go with a suitable online stock brokerage platform with the features beginners need to understand the ropes faster.
Options are the most popular types of high-risk investments, even though they may seem complex. Options are simply contracts for trading securities. These contracts don’t necessarily have to concern stocks, as you can buy or sell contracts for any underlying security, and they typically contain a package of 100 securities per contract.
Even if you purchase an option, that doesn’t obligate you to fulfill the contract terms. You can buy or sell the underlying security, sell the contract itself to another investor, or let the contract expire.
Why should you, as a new investor, go to such lengths to understand these particular investment options? Because stocks and many other securities fluctuate in value, and options allow investors to lock the price - thus allowing you to buy cheaper and sell for profit.
With the right options trading platforms, making your first educated trade is simple and allows for significant gains. Ultimately, even if you make the wrong estimate, you can forgo the purchase, boiling the risk down to the price of the contract itself.
The World of Alternative Investments
New investors could consider other types of alternative investments if they have yet to become comfortable with online stock trading or have no interest in it but would still like to invest.
Investing in Real Estate
Real estate is the most common alternative investment, and it’s the world’s most significant asset class as well. It’s attractive to many, as it has a similar characteristic to bonds - you get stable cash flow from tenants throughout their stay at your property, and you can always sell it to get your principal back, and profit if house prices rise.
Valuation presents the greatest challenge in the ever-changing real estate market. Still, people who don’t want to risk purchasing properties can participate in real estate investment opportunities by purchasing shares in real estate investment trusts (REITs) which act as mutual funds and trade properties like stocks.
Forex trading has been gaining popularity in recent years, even though the concept is far from new. Investing in foreign currencies has been around for a while now, and forex allows trading in pairs of currencies, staking the dollar’s value over the euro, for example.
Economic and geopolitical events heavily influence the value of currencies, so people who are savvy in those fields can make better predictions when trading on a forex platform.
Another investment opportunity with extreme profit possibilities - and one of the main types of short-term investments currently - is virtual or cryptocurrency. This new type of currency has made quite an impact in the modern world and turned many people into millionaires overnight.
The first and most popular cryptocurrency, Bitcoin, is famous for its volatility, rising and falling in value exponentially throughout just a couple of months. This allowed for excellent profits on the one hand, but massive losses on the other. However, the cryptocurrency world is much bigger than Bitcoin, with many altcoins, utility tokens, and stablecoins, all of which are created with a specific purpose that serves to determine their value.
With the right crypto exchange, you stand to gain a great deal, as these currencies allow for making the quickest potential profits among all types of investments.
Investing money in commodities is typical. People know that gold, silver, oil, or even some agricultural products will always be valuable, which means investing in these is usually a good idea. Not the idea with the biggest most liquidation potential, perhaps, but commodities are one of the few investments that offer reliable payouts in uncertain times.
Beginners just dipping their toes in the world of investing might have the best chances of success with some of the automated advisors available on the market. These platforms provide fully automated and AI-driven financial planning services, taking a lot of work off the investors’ plate. While it’s not specifically one of the types of investments for beginners, putting your trust in a robo-advisor to select stocks, options, or any other securities for you could be the most sensible course of action.
Upon making an account, investors fill out a form that provides these robo-advisors with the necessary insight into your current financial situation and informs them of your investment goals. This process is similar to hiring a financial adviser, but for a fraction of the cost, making it perfect for beginners looking to earn their wealth through investing.
Just as a human financial adviser would, these robo-advisors will recommend trading choices or even invest your assets based on the data you’ve given them.
To Sum It Up
Investing is certainly an excellent means for a wealthier future. Still, there is a long list of types of investments, and this article barely scratched its surface. Investing requires quick learning, and new investors might be in for quite a bumpy ride.
The most important rule of investing is never to put all your eggs in the same basket and invest only what you can afford to lose. Getting familiar with more than one type of investment before putting down any money is advisable and could significantly impact your future.
What is the seven-year rule for investing?
The seven-year rule states that you can double your initial investment on securities that allow 10% interest in seven years. However, investment options that have a 10% interest are typically riskier. If you were to invest in a bond with an average 5% to 6% return, you would also double your money, but in about 12 years.
What are the five stages of investing?
The first stage is establishing portfolio goals. Once you know what you are working towards, it is vital to develop strategic asset allocation as the second step. Next is research and selection, which is followed by portfolio implementation. The fifth and the last stage is the most important: Ongoing monitoring and due diligence.
What is the riskiest investment?
Options and futures are the two types of investments considered the riskiest, especially for a novice without a background in technical analysis. Even experienced financial advisers would advise against making them, as they are similar to gambling. Since the prices in the options market can change quickly, this type of trading is best left to experienced investors.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.