What are the different types of investments?
If you are new to the world of investing you may be overwhelmed and confused as you hear the various investment terms thrown about.Sorting out exactly what each investment is and what it can and cannot do is crucial to determining what the right investment for your needs is.Here is a brief overview of what are the different types of investments-
- Stocks- One of the most important things to remember is that when you purchase stocks (or equities) you become a part owner of the business. This ownership entitles you to vote at the shareholders' meeting and allows you to receive any profits that the company allocates to its owners. These profits are then referred to as dividends. An important fact to remember is that while bonds provide a steady stream of income, stocks are volatile.In other words stocks can fluctuate in value on a daily basis. Beginning investors should understand that when you buy a stock, you are not guaranteed anything. In fact, many stocks do not even pay dividends, in which case, the only way that you can make money is if the stock increases in value which might not ever happen.The upside to stocks is that compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.
- Bonds-This type of investment is grouped under the general category called fixed-income securities and is commonly used to refer to any securities that are founded on debt. It is important to know that when you purchase a bond, you are lending out your money to a company or government. In return, they will agree to give you interest on your money and eventually pay you back the amount you lent out. The main upside of bonds is their relative safety. The bottom line is that if you are buying bonds from a stable government, your investment is virtually guaranteed, or risk-free. However it is important to realize that the safety and stability come at a cost. Because there is such little risk, there is little potential on return return. As a result, the rate of return on bonds is generally much lower than other securities.
- Mutual Funds-A mutual fund is defined as a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional fund manager to select specific securities for you. It is important to keep in mind that mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, etc. The biggest benefit of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment. In addition, you should get a better return by giving your money to a professional than you would if you were to choose investments yourself.
- Other types of investments- There are numerous alternative vehicles, which represent the most complicated types of securities and investing strategies. This can include but is not limited to:Options, Futures, FOREX, Gold, Real Estate, etc. These are generally not investment for beginners.They are considered high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. It is important to keep in mind that while there is the opportunity for big profits, they require some specialized knowledge.