Investing your hard-earned money can be very scary. This is true for both beginners and experts. That being said, investing is also one of the most effective ways to plan for and secure a financially stable future. The trick, of course, is to find investments that match your portfolio and multiple your money. This guide will help you make an informed decision by shedding some light on five of the most common types of investment.
Stocks
One of the most popular and simple modes of investment is stocks. Buying stock implies that you are purchasing certain amounts of ownership in a publicly-traded corporation or company. The question that then begs an answer is how do you profit from this type of investment? The idea is to purchase stocks in companies with the hope that the price of the stocks will go up. You can then sell these stocks for a higher price and make a profit. Of course, there is a great deal of risk involved with stock investments. Every investment may not yield a profit. In some cases, the price of the stock may drop, and you could end up losing money. This is why investing in stocks requires good market knowledge. Most individuals opt to invest in stocks with the help of brokers.
Mutual funds
A mutual fund is a fund where investors pool their money to invest in a broad range of companies. These funds can be both actively and passively managed. An actively managed fund is managed by a fund manager. The job of a fund manager is to find and choose stocks and securities which are safe and profitable for the investors. Fund managers usually try their best to beat the market index and choose funds that outperform the index. Their aim here is to maximize profits with little to no risk. On the other hand, passive mutual funds, popularly known as index funds, work by tracking the stock market index. There is no individual managing these funds. When it comes to mutual funds, investors make money when the price of invested stocks and securities increases.
Bonds
A bond is basically a loan that an investor will lend to an entity of their choice. These entities include corporations, governments, and federal agencies. In exchange for the money loaned, these entities usually offer interest payments over specified time periods. Not to mention, you will get your principal sum once the bond has matured. There are tons of different types of bonds based on who is issuing them. Corporations issue corporate bonds, whereas governments and federal agencies issue municipal bonds. Treasuries also issue bonds known as treasury bonds, notes, and bills. The profit that you make from bonds is much less compared to the profits made from stocks and other forms of investment.
Exchange-traded funds
Exchange-traded funds, also known as EFTs, are very similar to mutual fund investments. They are a collection of investments that track the market index. However, there is a major difference between the two. Mutual funds are bought through a fund company. Exchange-traded funds, however, are sold and bought on the stock market in the form of shares. This means that the price of an EFT can vary throughout the day. Investors can make money on EFTs in the same way they make money on stocks. But, since EFTs work like mutual funds, the risk of loss is less compared to stocks and other modes of investment.
Retirement plans
Retirement plans are some of the most common and low-risk forms of investment. There are many different types of retirement plans, including plans offered by the employer and individual retirement plans. Plans that are offered by the employer include 401(k) and 403(k) plans. Individual plans include the Individual Retirement Plan (IRA) and the Roth IRA. Once you opt for a retirement plan, you need to put aside fixed amounts of your paycheck. The money that is collected over time can be withdrawn once you have reached retirement or crossed a certain age. Note that retirement plans offer tax exemptions that allow you to save.
