There are a lot of options for where to put your money nowadays. It’s important to weigh these different types of investments carefully.
Think of the various types of investments as tools that can help you achieve your financial goals. Each investment type has its own general set of features and risk factors.
Here are the four main ways you can invest:
Business ownership
Ownership investments are the most volatile and profitable class of investment. The most popular type of ownership investment is the stock. Owning stock means owning a portion of a company. It may be a small stake, but at the end of the day, it is still ownership.
All traded securities, from futures to currency swaps, are ownership investments. Investors purchase them in order to share in the profits, or because they will increase in value or both.
Profit does or does not materialize by how the market values the asset you own the rights to. If you own shares in Tesla (TSLA) and the company posts a record profit, other investors are going to want Tesla shares too.
Their demand for shares drives up the price, increasing your profit if you choose to sell the shares.
Property
Houses and apartments that are purchased to rent out or to resell are also investments. They are known as property investments.
The house you live in has numerous functions. It fulfills a basic need for shelter. It may increase in value over time, but it may also depreciate, depending on market conditions. A house not only provides basic necessities, but it may also be a source of income that is realized when the house is sold at a profit.
Gold and rare gemstones, Pokemon cards, and NFTs all can all be considered ownership investments, provided that these objects were bought with the intention of reselling them for a profit.
Like all investments, they may rise or fall in value over time. Tastes in art and collectibles change. Gold and gems have market values that fluctuate.
Lending
Lending money is a category of investing. The risks generally are lower than for many investments. Therefore, the rewards are also comparatively modest.
A bond issued by a company or a government will pay a set amount of interest over a set period of time. The only real risk is that the company or government will go bankrupt. If this were to happen, the bondholder may get little or none of the investment back.
A regular savings account is an investment. The investor is essentially lending money to the bank. The bank will pay interest to the account holder and will earn its profit by loaning out the rest of the money to businesses at a higher rate of interest.
The return on savings accounts is currently quite low, but the risk is essentially zero. In the U.S., savings accounts are fully insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).
A bond issued by a company or a government will pay a set amount of interest over a set period of time. The only real risk is that the company or government will go bankrupt. If this were to happen, the bondholder may get little or none of the investment back.
Cash
Cash equivalents are investments that can be converted back to cash easily and quickly.
Money market funds are similar to savings accounts and can be purchased at any bank. The difference is that the investor commits to leaving the money alone for a period of time in return for a slightly higher rate of interest. The time period is as little as three months and no longer than a year.
Money market funds are more liquid than other investments, meaning you can write checks out of money market accounts just as you would with a checking account. Although, once you start writing checks on it you’ve erased much of its value as an investment.
