Investing is a way to grow your assets and having a growing amount of savings or assets, investing is an essential part of becoming wealth or preserving what you have. Having money to invest is a great feeling, it’s a feeling of confidence, and security, but for many of us it’s not clear how to earn enough money to invest nor what are the best ways to invest. In this article we will discuss what are the types of investments for you to invest your hard earned money. We will go over bonds, stocks, bitcoin, ETFs, Mutual Funds, CDs, and traditional savings accounts. While there are many more ways to invest, we will start with these options.
Bonds are an investment type that is typically characterized by having periodic, or regular, payments to the bond holder. To buy a bond, a person will typically spend $1000 increments to purchase the bond in a capital investment. The traditional bond will guarantee the return of the initial capital investment if you hold it to maturity. So let’s discuss an example of a bond, if you buy a $25,000 bond that pays 4% coupon annually that matures in 10 years here is how it will work.
1.) The bond will pay you back $25,000 dollars after 10 years.
2.) The bond holder will get $25,000*4% or $1,000 each year.
Sounds pretty good right? Well it can be good to own bonds if the stock market is performing poorly, or if the interest coupon of the bonds that you own is above what the market is paying. However, bonds are typically though to be a conservative investment type and they will earn you less than owning a stock.
Stocks are an investment into an underlying company, and represent an ownership share in a publicly registered company. This means basically that if the company is growing and earning money, then your stocks internal value will generally go up which may lead to an increase in the stock price of your investment. Now, investing in stocks can be challenging and the ways that stocks are valued is not that simple. It is beyond the scope of this article to get into the principles of stock valuation, but let’s just say that stocks are valued based on their business performance and relative valuation when compared to other stocks listed on public markets. Let’s go into a brief example:
If you buy Apple stock, and their stock ticker is AAPL you are investing into the underlying company Apple. And so if Apple continues to sell a lot of iPhone’s and iPad’s then you have a good chance that the overall company will be earning more money and thus the stock price should go up. With a stock, you can also get a recurring payment as well in the form of a dividend. In general with a stock, if you invest $25,000 and hold it for 10 years, you will get back a return based on the stock price after 10 years. After 10 years, it is possible that Apple has gone completely out of business and thus your investment would be worth zero! Or on the contrary, your investment can be worth multiples more than the price of when you invested into it.
A shocking 20 year return for investing $5,000 into Amazon on the day they went public, would have turned into $2.4 million dollars. Yes, we can all say WOW. But to keep this in perspective, there are a lot of tech companies that completely went out of business since the first day when Amazon began selling books online. In those twenty years, Amazon became one of the largest companies in the world and so there should be no surprise that that stock became worth a lot.
Bitcoin & Cryptocurrency
As a professional investor, my opinion is to avoid cryptocurrency at all costs. The reason for my opinion on this, is that there is no real way to value what the cryptocurrency market. It is totally possible that bitcoin will continue to go up, but the risk of these investments is really high, especially for the beginning investor. If you are a seasoned and professional investor than you should know the high level of risk and volatility in this asset class. If you are a beginner, they just avoid this space until it becomes more defined can be valued more traditionally.
ETF & Mutual Funds
ETFs and mutual funds are funds that offer ways to invest into baskets of stocks or bonds. So, instead of buying one or two stocks, you may get tens or hundreds of stocks in the portfolio. The larger number of stocks, makes it more like you are investing into the whole market, or and entire sector of the market. The larger number of stocks or bonds, increases diversification and thus reduces the risk of the investment. This is one of the main benefits of choosing an ETF or mutual fund. There are many pros/cons of investing into these fund types, and we will go into this on other pages in this site.
CD and Savings Accounts
These are some of the least risky types of investment types that a person can invest into. You will not have a lot of risk when investing into these, unless the company that you transact with goes out of business. But in many cases of bankruptcy, the US government will back your savings, so be sure to check into if the FDA backs the account or CD that you are investing into.
Which Types of Investments are Best for You?
In summary, knowing which investment type is best for your situation is impossible to answer in a blog post. There are so many factors that will go into making a sound investment recommendation. The details on this page will hopefully give you some basic understanding of a few investment strategies and types of investments to assist in your decision making. Many investment advisor’s make blanked suggestions that people should invest 60% in equities and 40% in bonds. I do not recommend or suggest this for you, and you should not take it as a good strategy until you know a little more. So, do your research and you can make some good investment decisions.