Most people know that they should invest if they want their money to outpace inflation over the long run. But it’s easy to get overwhelmed by the sheer volume of investment information that’s available, from 24-hour financial news shows to endless articles on the internet. While there is no best investment type for every investor, your own personal financial objectives and risk tolerance will help guide you to what’s best for you.
Types of Investments
Investments can be categorized in several different ways. A simple way to think about them is by the three types of returns they can generate: growth of the original investment through appreciation; income from dividends; or a combination of growth and income.
Asset classifications provide a more specific categorization. The four primary asset classes are:
- Fixed income
Cryptocurrency is believed by many to qualify as well. In a 2021 Top of Mind report from Goldman Sachs, the overwhelming majority of experts surveyed agreed that cryptos “can and should be considered an institutional asset class.”
Of course, there are countless types of specific investments within these broader categories. But if you confine your search to these 10 main types of investments, it can help prevent you from being overwhelmed.
When people think about long-term investments, stocks are usually at the top of the list. A share of stock represents ownership in a company. Most well-known companies, from Amazon and Apple to Tesla and Coca-Cola, are publicly traded, meaning you can buy or sell shares of their stock on an exchange. Although supply and demand is what makes the share price of a stock fluctuate from minute to minute, it is the financial success of the underlying business that is one of the primary drivers of a stock’s price.
How To Make Money From Stocks
You make money from stocks when you sell them for more than you paid for them — or, in the case of income stocks, when they pay out dividends. In most cases, you’ll need to hold the stocks for a long period of time to see significant returns. The tricky part is knowing which stocks have good long-term prospects ahead of them. Two ways to identify good stocks are to research companies on personal finance sites and read companies’ quarterly and annual financial reports.
Bonds are income-generating investments that are generally more conservative than stocks, which is part of the reason their expected return is generally lower. A bond is essentially a loan agreement in which investors provide money to companies in exchange for the promise of ongoing interest payments and the return of their principal at a specified future date. In a perfect world, this would make bonds extremely low risk, and this can indeed be the case. However, bonds are not without risk. If an issuer has financial difficulties, it may not be able to make payments.
How To Make Money From Bonds
Many bonds carry ratings from outside agencies to help investors gauge the financial risk of a bond issuer. But bonds also carry interest rate risk due to the fact that bond prices trade down when interest rates rise, and vice versa. Therefore, it’s important to research the company or other entity issuing the bond and stay abreast of economic trends that influence interest rates.
3. Savings Accounts
Savings accounts are among the most conservative investments. They’re insured by the Federal Deposit Insurance Corp. up to $250,000, and many banks and brokerages tack on additional insurance to this amount as well. However, savings accounts generally have low returns. For example, as of July 13, the national average savings interest rate was just 0.42% annually, according to the FDIC. While savings accounts aren’t generally appropriate for long-term investment goals, they can be excellent choices for short-term savings, such as your emergency fund.
How To Make Money From a Savings Account
To maximize your returns from a savings account, consider choosing a high-yield account at an online bank. With low overhead, these types of banks offer 4% or more.
4. Certificates of Deposit
A certificate of deposit is a time deposit account that has a fixed interest rate and maturity date, and it carries the same FDIC insurance as savings accounts. Generally speaking, CDs pay slightly higher interest rates than savings accounts. However, they also typically have early withdrawal penalties, meaning you shouldn’t invest unless you’re willing and able to tie up your money for a period of time. CDs usually have maturity dates ranging between three months and 10 years, so they do offer some flexibility.
How To Make Money From CDs
The average rate for a 12-month CD is just 1.63% as of July 13, according to the FDIC. However, many online banks as well as some traditional banks and credit unions pay rates above 5%, so it’s worth shopping around for the best rate.
Another way to maximize your CD investment is to build a “CD ladder” by purchasing several CDs of different maturities. For example, you might spread out a $10,000 total investment over five different CDs, with maturities ranging from one to five years. As each CD matures, you reinvest it in a new five-year CD. Eventually, you’ll have five five-year CDs, with one maturing each year. The advantage of this strategy it gets you the higher rates that longer-term CDs typically earn while allowing you access to some of your money every year.
5. Mutual Funds
Mutual funds date back to 1924 and have long been a favored investment option by the general public. Under the guidance of professional managers, mutual funds pool money from investors and invest it according to written guidelines. Actively managed funds have portfolio managers who select investments for the fund’s portfolio. Index funds also have portfolio managers, but rather than select investments, they try to replicate an index, such as the S&P 500. One of the drawbacks of traditional mutual funds is that they may only be bought or sold once per day, at the close of the trading day.
How To Make Money From Mutual Funds
All mutual funds have fees, and actively managed funds have higher fees. Additionally, the fund managers’ trades can result in capital gains taxes for investors. If you’re a novice investor, your best bet for making money with a mutual fund is to select an index fund with low management fees.
6. Exchange-Traded Funds
Exchange-traded funds are a modern take on traditional mutual funds. They typically hold a portfolio of securities but trade on an exchange as a single investment, like a stock. Unlike a traditional mutual fund, an ETF can be bought and sold on an exchange any time the market is open.
How To Make Money From ETFs
Exchange-traded funds often have specialized portfolios that track either a specific market index or a specific sector of the market, such as the S&P 500 index or technology stocks. Index funds are a safer bet for long-term gains. Trading ETFs through a commission-free brokerage helps to minimize the cost and preserve the value of your investment.
Commodities are physical products like oil, orange juice, pork bellies and gold. An investment in commodities is often considered to be a hedge against inflation, as the prices of these items rise in line with general cost increases.
How To Make Money From Commodities
Commodities trading is dominated by professional traders and institutions, and it can be difficult for general retail investors to participate directly. Commodities can also be extremely volatile, as unexpected events like bad weather, supply chain issues or geopolitical issues can dramatically affect the prices of individual products. There are some mutual funds and ETFs that provide easier access for retail investors to commodities, and they offer the best opportunity for making money through this asset class.
Annuities are insurance contracts that provide payments to investors on a regular basis. There are two main types: fixed and variable. Fixed annuities convert an initial premium into regular income payments, typically at a fixed interest rate. Variable annuities generally have a growth component during an accumulation phase and then convert to income-paying investments during the distribution phase.
The main reason to own an annuity is to create an income stream that you can’t outlive. Unlike bonds, which pay off at a specified maturity date, annuities generally continue payments for the remainder of your life. While there are many types, each with its own benefits and risks, all are complicated instruments that can squander your nest egg if you’re not careful.
How To Make Money From Annuities
The best way to make money from an annuity is to consult with a fiduciary financial advisor — that is, one who earns a flat fee rather than a commission, and is legally and ethically obligated to act in your best interest — to determine what type is best for your situation.
At its most basic level, an option is a financial instrument that grants you the right to buy or sell a stock at a specific price at a date in the future. Options come in many varieties, and professional traders generally use them in a combination of hedging and speculative strategies. While options offer the potential for immense gain, they also carry the risk of the 100% loss of your investment.
For example, let’s say you invest $500 in a call option, which gives you the right to buy a stock at $100 per share in the next three months. If that stock never rises above the specified price, which is known as the strike price, your option will expire worthless. However, if the stock rises significantly above $100, your investment could double or triple, or even more.
How To Make Money With Options
Although some more conservative strategies are available using options, they are generally considered speculative investments that are only appropriate for experienced investors. That said, the major online brokerages have educational material that can help you get started, but it’s a good idea to open a practice account to learn the ropes before risking your money.
Cryptocurrency in general is a digital currency that has its transactions recorded on a decentralized, encrypted blockchain. The theory behind crypto is that it offers privacy and reliability beyond current fiat currency systems run by governments the world over. It’s the newest asset class on this list, and it’s by far the most speculative
Even bitcoin, the largest and most well-known cryptocurrency, is highly volatile, ranging in price from $15,599 to $31,815 over the past year.
How To Make Money With Cryptocurrency
The bottom line is that while cryptocurrency may give your portfolio a bounce at some point, the speculative nature of the asset class means you’re more likely to lose money than make it. One way to limit your exposure without missing potential gains is to invest in stable companies that are involved with cryptocurrency — Tesla, PayPal and Nvidia, for example — instead of purchasing the currency itself.
The Bottom Line
Although investing can seem overwhelming at first glance, if you take the time to understand the major types of investments, you’re likely to find some that match your investment objectives and risk tolerance. For some investors, working with a financial advisor is the best way to start, while others may prefer to open their own accounts with online brokerages and learn through experience. Either way, be sure to manage your risk and understand what you are investing in so that you can set yourself up for long-term success.
Daria Uhlig contributed to the reporting for this article.
Information is accurate as of July 13, 2023.
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