Types of Investments: How To Choose the Right One for You

Most people know that they should invest if they want their money to outpace inflation over the long run. But with endless financial news and articles, it’s easy to get overwhelmed. 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.

Read on to learn the different types of investments and how you can decide which one is right for you. 

Stocks

When people think about the different types of 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.

Supply and demand is what makes the share price of a stock fluctuate from minute to minute. However, the financial success of the underlying business is one of the primary drivers of a stock’s price.

Differences Between Common and Preferred Stocks

There are two different types of stocks: common and preferred. It is important to understand the differences between the two. 

Importance of Diversification

As an investor, you want to spread risk across different types of stock. In support of this goal, it is a good idea to diversify your portfolio.

Key points of diversification include the following: 

• Spread risk across multiple industries. Invest in different industries so you’re not focusing your investment on a single industry. 
• Look at company size. Choose small and large companies to work toward achieving growth potential. 
• Consider geography. Spread your investments in companies based nationally and internationally. 

Good To Know

When Johnson & Johnson went public in 1944, the opening stock price was $37.50. Those who bought and held onto shares will understand how this investment paid off.

The current price of Johnson & Johnson stock is about $169. Similar trends have been seen with Google, Coca-Cola and Microsoft. 

Bonds

Bonds are income-generating investments that are generally more conservative than stocks. This is part of the reason their expected return is generally lower.

Here are some key facts to know:

• 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.
• When interest rates rise, generally bond prices fall. When rates fall, bond prices rise.
• New bonds with higher yields become more attractive, reducing demand for existing lower-yield bonds.

Different Types of Bonds 

There are three types of bonds: government, municipal and corporate bonds. Here is how these bonds differ from one another: 

• Government bonds. These are bonds issued by the national government. They are considered low risk because they are backed by the government. 
• Municipal bonds. Funding for public projects is done through municipal bonds. These are bonds issued by state and local governments and can sometimes be tax-exempt. 
• Corporate bonds. In order to raise capital, companies issue these bonds. These are riskier than government bonds. 

Bond Ratings and What They Mean 

Credit rating agencies like Moody’s and Fitch rate bonds based on the company’s ability to repay debt. Investment-grade bonds are rated between AAA to BBB- are considered lower risk and have lower yields. Junk bonds are rated BB+ and below and are considered higher risk, but potentially will bring higher returns. 

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 be bought or sold only once per day, at the close of the trading day.

There are different types of mutual funds.

• Equity fund: Focused on stocks that yield dividends or focus on growth potential. Tech stocks are one example of a mutual fund focused on equity.
• Bond funds: These bonds are focused on fixed-income securities for income and stability. You can invest in treasury and municipal bonds.
• Balanced bonds: These investments combine features of both stocks and bonds. This minimizes risk and increases diversification. 

Actively Managed Funds vs. Index Mutual Funds: Key Differences

Actively managed funds and index mutual funds have a significant key difference. Actively managed funds are investments that are chosen by a fund manager. The goal is to choose investments that will outperform the market. 

Investing in index funds is a more conservative approach. Your financial strategy is to invest in funds that match a particular market. For instance, you can choose the S&P 500 as a market. This is a passive investment strategy with lower risk. 

What You Need To Know About Expense Ratios

An expense ratio has an impact on returns.

It takes money to manage the operating costs of the fund. That amount is taken out of the percentage of assets.

A lower ratio generally means higher net returns. Conversely, a higher ratio can reduce long-term gains. 

Certificates of Deposit

A certificate of deposit is a time deposit account that has a fixed interest rate and maturity date. 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 Set Up a CD Ladder

One way to maximize your CD investment is to build a “CD ladder” by purchasing several CDs of different maturities. Here’s an 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 is that it gets you the higher rates that longer-term CDs typically earn while allowing you access to some of your money every year.

Real Estate Investments 

Investing in property can be a good strategy to diversify your portfolio. You can earn rental income or capitalize on property appreciation. 

Some real estate investment strategies that you can explore involve buying real estate. You can buy real estate property, homes and apartments. These investments can provide rental income, or you can sell residential property for a profit.

Another opportunity is to invest in commercial real estate properties. You can purchase office buildings, retail spaces or industrial properties for business use. 

Some more experienced investors take part in house flipping and real estate crowdfunding.

• House flipping: Involves buying undervalued properties, renovating the space and then reselling it for a profit.
• Real estate crowdfunding: Involves investing small amounts in property projects via online platforms.

Direct Property Ownership vs. Real Estate Investment Trusts: Pros and Cons

There are key differences between direct property ownership vs. REITs, and both approaches have pros and cons. Take a look at this table comparing the two: 

Factors Influencing Real Estate Markets

There are different factors that impact the real estate market.

• Economic conditions like gross domestic product, employment rates and interest rates can influence affordability.
• Housing shortages can increase demand and drive prices up. The opposite also occurs when there are too many houses on the market. Oversupply will lower values. 
• The location of the property also matters. Schools, businesses and transportation impact demand as well. 

Commodities

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. Basically, commodities retain value when inflation rises.

Generally, gold and precious metals historically hold purchasing power. Similarly, prices of oil, gas and food typically rise with inflation, making them good hedges.

When considering this type of investment, keep these key points in mind:

• 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 that provide easier access to commodities for retail investors, and they offer the best opportunity for making money through this asset class. 

How To Invest in Commodities

There are several ways to invest in commodities. Here are some of the ways to invest: 

• Buy the physical asset. You can buy the physical asset. Investors can purchase gold, silver or another precious metal. 
• Participate in future contracts. You can enter into an agreement to buy or sell a commodity at a future price. This strategy has a higher risk. 
• Own stock. You can own stock in a company that is engaged in producing commodities. One example would be ExxonMobil. 

Annuities

Annuities are insurance contracts that provide payments to investors on a regular basis. Here’s a breakdown of the main types of annuities:

• 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.
• Indexed annuities are tied to a market index like the S&P 500 that has the potential to capitalize on growth potential. 

Fees Associated With Annuities 

There are fees associated with annuities. Here are some of those fees:

• Surrender charges: There are penalties for early withdrawals prior to surrender. Most annuities have a surrender period between five to 10 years. 
• Annual fees: Management fees can apply to variable annuities. These are typically one to three percent. 
• Rider costs: Optional benefits like lifetime income guarantees can increase costs.

Keep in mind that annuities are backed by insurance companies and so they tend to remain stable. You can check credit ratings through agencies like Moody’s. 

Annuities offer guaranteed lifetime income. However, for those who are seeking liquidity or high market returns, an annuity may not be the best fit. A balanced approach may mean combining annuities, stocks, IRAs and mutual funds for diversification purposes. 

Retirement Investments 

Retirement accounts are a popular way for individuals to build their investment and financial portfolios. 

Here are some common retirement-focused investments: 

• 401(k). This is an employer-sponsored plan with pre-tax or after-tax contributions and often includes employer matching.
• Traditional IRA. A traditional IRA is an investment vehicle that allows for tax-deductible contributions. Funds grow tax-deferred and are taxed at withdrawal.
• Roth IRA. With a Roth IRA, contributions are made after taxes, but withdrawals in retirement are tax-free.

Employers have the opportunity to participate in matching contributions, which ultimately increases retirement savings for you. This also allows for funds to grow tax deferred and reduces your taxable income. 

Daria Uhlig and John Csiszar contributed to the reporting for this article.

Information is accurate as of March 10, 2025.