You probably have things you want to do with your money down the road: buy a house, save for retirement, fund college for your kids, maybe even go on a big trip or do a major remodel. And you may be wondering if investing can help you achieve those goals.
It’s never too early or too late to start investing. There are a number of different ways you can put your money to work, including choosing different investment types.
9 Types of Investments
Before deciding on your investments, ask yourself what your financial goals are. Then try to build a portfolio that achieves those goals, balancing risk with return and maintaining a diverse mix of assets.
Having different types of investments, as well as short term vs long term investments can help you achieve portfolio diversification.
When you think of investing and investment types, you probably think of the stock market. They are, essentially, investment fund basics. A stock gives an investor fractional ownership of a public company in units known as shares.
Only public companies trade on the stock market; private companies are privately owned. They can sometimes still be invested in, though the process isn’t always as easy and open to as many investors.
A stock makes money in two ways: It could pay dividends if the company decides to pay out part of its profits to its shareholders, or an investor could sell the stock for more than they bought it.
Some investors are looking for steady streams of income and therefore pick stocks because of their dividend payments. Others may look at value or growth stocks, companies that are trading below their true worth or those that are experiencing revenue or earnings gains at a faster pace.
Pros and Cons of Stock Investments
|If the stock goes up, you can sell it for a profit.||There are no guaranteed returns. For instance, the market could suddenly go down.|
|Some stocks pay dividends to investors.||The stock market can be volatile. Returns can vary widely from year to year.|
|Stocks tend to offer higher potential returns than bonds.||You typically need to hang onto stocks for many years to achieve the highest potential returns.|
|Stocks are considered liquid assets, so you can typically sell them quickly if necessary.||You can lose a lot of money or get in over your head if you don’t do your research before investing.|
Bonds are essentially loans you make to a company or a government — federal or local — for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime.
When it comes to bonds vs. stocks, the former are typically backed by the full faith and credit of the government or large companies. Because of this, they’re often considered lower risk than stocks.
However, the risk varies, and bonds are rated for their quality and credit-worthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be some of the least risky investments. However, they also tend to have lower returns.
Different Types of Bonds
Treasurys: These are bonds issued by the U.S. government. Treasurys can have maturities that range from one-month to 30-years, but the 10-year note is considered a benchmark for the bond market as a whole.
Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.
Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest. High-yield bonds, also known as junk bonds, tend to have higher yields but lower credit ratings.
Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.
Zero-coupon bonds: Zero coupon bonds may be issued by the U.S. Treasury, corporations, and state and local government agencies. These bonds don’t pay interest. Instead, investors buy them at a great discount from their face value, and when a bond matures, the investor receives the face value of the bond.
Pros and Cons of Bond Investments
|Bonds offer regular interest payments.||The rate of returns with bonds tends to be much lower than it is with stocks.|
|Bonds tend to be lower risk than stocks.||Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell.|
|Treasurys are considered to be safe investments.||Bonds can decrease in value during periods of high interest rates.|
|High-yield bonds tend to pay higher returns and they have more consistent rates.||High-yield bonds are riskier and have a higher risk of default, and investors could potentially lose all the money they’ve invested in them.|
💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.
3. Mutual Funds
A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.
Pros and Cons of Mutual Fund Investments
|Mutual funds are easy and convenient to buy.||There is typically a minimum investment you need to make.|
|They ate more diversified than stocks and bonds so they carry less risk.||Mutual funds typically require an annual fee called an expense ratio and some funds may also have sales charges.|
|A professional manager chooses the investments for you.||Trades are executed only once per day at the close of the market, which means you can’t buy or sell mutual funds in real time.|
|You earn money when the assets in the mutual fund rise in value.||The management team could be poor or make bad decisions.|
|There is dividend reinvestment, meaning dividends can be used to buy additional shares in the fund, which could help your investment grow.||You will generally owe taxes on distributions from the fund.|
Exchange traded funds can appear to be similar to a mutual fund, but the main difference is that ETFs can be traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. They also come in a range of asset mixes.
Pros and Cons of ETF Investments
|ETFs are easy to buy and sell on the stock market.||The ease of trading ETFs might tempt an investor to sell an investment they should hold onto.|
|They often have lower annual expense ratios (annual fees) than mutual funds.||A brokerage may charge commission for ETF trades.This could be in addition to fund management fees.|
|ETFs can help diversify your portfolio.||May provide a lower yield on asset gains (as opposed to investing directly in the asset).|
|They are more liquid than mutual funds.|
An annuity is an insurance contract that an individual pays upfront and, in turn, receives set payments.
There are fixed annuities, which guarantee a set payment, and variable annuities, which put people’s payments into investment options and pay out down the road at set intervals. There are also immediate annuities that begin making regular payments to investors right away.
Pros and Cons of Annuity Investments
|Annuities are generally low risk investments.||Annuities typically offer lower returns compared to stocks and bonds.|
|They offer regular payments.||They typically have high fees.|
|Some types offer guaranteed rates of return.||Annuities are complex and difficult to understand.|
|Can be a good supplement investment for retirement.||It can be challenging to get out of an annuities contract.|
There are several types of derivatives but two popular ones are futures and options. Futures contracts are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.
Meanwhile, in options trading, buyers have the right, but not the obligation, to buy an asset at a set price.
A derivatives trading guide can be helpful to learn more about how these investments work.
Pros and Cons of Derivative Investments
|Derivatives allow investors to lock in a price on a security or commodity.||Derivatives can be very risky and are best left to traders who have experience with them.|
|They can be helpful for mitigating risk with certain assets.||Trading derivatives is very complex.|
|They provide income when an investor sells them.||Because they expire on a certain date, the timing might not work in your favor.|
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
A commodity is a raw material — such as oil, gold, corn or coffee. Trading commodities has a reputation for being risky and volatile. That’s because they’re heavily driven by supply and demand forces. Say for instance, there’s a bad harvest of coffee beans one year. That might help push up prices. But on the other hand, if a country discovers a major oil field, that could dramatically depress prices of the fuel.
Investors have several ways they can gain exposure to commodities. They can directly hold the physical commodity, although this option is very rare for individual investors (Imagine having to store barrels and barrels of oil).
So many investors wager on commodity markets via derivatives — financial contracts whose prices are tied to the underlying raw material. For instance, instead of buying physical bars of precious metals to invest in them, a trader might use futures contracts to make speculative bets on gold or silver. Another way that retail investors may get exposure to commodities is through exchanged-traded funds (ETFs) that track prices of raw materials.
Pros and Cons of Commodity Investments
|Commodities can diversify an investor’s portfolio.||Commodities are considered high-risk investments because the commodities market can fluctuate based on factors like the weather. Prices could plummet suddenly.|
|Commodities tend to be more protected from the volatility of the stock market than stocks and bonds.||Commodities trading is often best left to investors experienced in trading in them.|
|Prices of commodities are driven by supply and demand instead of the market, which can make them more resilient.||Commodities offer no dividends.|
|Investing in commodities can help hedge against inflation because commodities prices rise when consumer prices do.||An investor could end up having to take physical possession of a commodity if they don’t close out the position, and/or having to sell it.|
8. Real Estate
Owning real estate, either directly or as part of real estate investment trust (REIT) investing or limited partnerships, gives you a tangible asset that may increase in value over time.
If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.
Pros and Cons of Real Estate Investments
|Real estate is a tangible asset that tends to appreciate in value.||Real estate is not liquid. You may have a tough time selling it quickly.|
|There are typically tax deductions and benefits, depending on what you own.||There are constant ongoing expenses to maintain a property.|
|Investing in real estate with a REIT can help diversify your portfolio.||Owning rental property is a lot of work. You have to handle managing it, cleaning it, and making repairs.|
|By law, REITs must pay 90% of their income in dividends.||With a REIT, dividends are taxed at a rate that’s usually higher than the rate for many other investments.|
|REITs offer more liquidity than owning rental property you need to sell.||REITs are generally very sensitive to changes in interest rates, especially rising rates.|
|REITs don’t require the work that maintaining a rental property does.||REITs can be a risky short-term investment and investors should plan to hold onto them for the long term.|
9. Private Companies
Only public companies sell shares of stock, however private companies do also look for investment at times — it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.
Pros and Cons of Investing in Private Companies
|Potential for good returns on your investment.||You could lose your money if the company fails.|
|Lets investors get in early with promising startups and/or innovative technology or products.||The value of your shares in the company could be reduced if the company issues new shares or chooses to raise additional capital. Your shares may then be worth less (this is known as dilution).|
|Investing in private companies can help diversify your portfolio.||Investing in a private company is illiquid, and it can be very difficult to sell your assets.|
|Dividends are rarely paid by private companies.|
|There could be potential for fraud since private company investment tends to be less regulated than other investments.|
Investment Account Options
An investor can put money into different types of investment accounts, each with their own benefits. The type of account can impact what kinds of returns an investor sees, as well as when and how they can withdraw their money.
A 401(k) plan is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.
Pros and Cons of 401(k)s
|Contributions you make to a 401(k) can reduce your taxable income. The money is not taxed until you withdraw it when you retire.||There is a cap on how much you can contribute each year.|
|Contributions can be automatically deducted from your paycheck.||Most withdrawals before age 59 ½ will incur a 10% penalty|
|Your employer may provide matching funds up to a certain limit.||You must take required minimum distributions from the plan (RMDs) when you reach a certain age.|
|You can roll over a 401(k) if you leave your job.||You may have limited investment options.|
IRA stands for “individual retirement account” — so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money pre-tax for retirement without needing an employer-backed 401(k).
Pros and Cons of 401(k)s
|Contributions are tax deferred. You don’t pay taxes until you withdraw the funds.||Low contribution limits ($6,500 in 2023).|
|You can choose how the money is invested, giving you more control.||There is a 10% penalty for most early withdrawals before age 59 ½.|
|Those aged 50 and over can contribute an extra $1,000 in catch-up contributions.|
A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, ETFs. Some brokerage firms charge fees on the trades you make, while others offer free trading but send your orders to third parties to execute — a practice known as payment for order flow. Investors can be taxed on any realized gains.
You might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.
There are even a number of investment options out there not listed here — like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business.
Pros and Cons of 401(k)s
|Offer flexibility to invest in a wide range of assets.||You must pay taxes on your investment income and capital gains in the year they are received.|
|Brokerage accounts provide the potential for growth, depending on your investments. However, all investments come with risks that include the potential for loss.||Investments in brokerage accounts are not tax deductible.|
|You can contribute as much as you like to a brokerage account.||There is a risk that you could lose the money you invested.|
Investing With SoFi
It might still seem overwhelming to figure out what kinds of investments will help you achieve your goals. There are different investment strategies and finding the right one can depend on where you are in your career, what your financial goals are and how far away retirement is.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
What is the most common investment type?
Stocks are one of the most common and well-known types of investments. A stock gives an investor fractional ownership of a public company in units known as shares.
How do I decide when to invest?
Some prime times to start investing include when you have a retirement fund at work that you can contribute to and that your employer may contribute matching funds to (up to a certain amount); you have an emergency fund of three to six months’ worth of money already set aside and you have additional money to invest for your future; there are financial goals you’re ready to save up for, such as buying a house, saving for your kids’ college funds, or investing for retirement. Please remember you need to consider your investment objectives and risk tolerance when deciding the “right” time to start investing.
Should I use multiple investment types?
Yes. It’s wise to diversify your portfolio. That way, you’ll have different types of assets which will increase the chances that some of them will do well even when others don’t. This will also help reduce your risk of losing money on one single type of investment. In short, having a diverse mix of assets helps you balance risk with return. However, diversification does not eliminate all risk.
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