7 Types of Investments You Should Know About
Investment is an important part of preparing for the future. If you ever want to retire, investments and other retirement savings are essential to your success. But if you don’t know where to start, the whole world of investing can seem daunting. Here’s a list of seven types of investments you should know about and how they can fit into your long-term financial plan.
Goods of treasure
Every investment carries some level of risk, but the least risky investment is with the United States government. Treasury bills are the closest thing to a “risk-free” investment you will find. But where there is little risk, you will also find little return.
Treasury bills are very low-risk investments that many investors buy through a mutual fund or ETF. Often referred to as “T Bills” by experienced investors, annual returns are around 2% at the time of writing in May 2022.
Certificates of deposit
The next level on the risk-reward scale is a bank certificate of deposit, or CD. CDs are a time-limited deposit account available at most banks and credit unions. Like checking accounts and savings accounts, CDs are FDIC insured for up to $250,000 per depositor, so there’s almost no risk with this investment, although calling it an “investment” instead that a “savings” product is easily questionable.
Many banks offer IRA CDs, which work like a tax-advantaged retirement account. However, the interest you will get from this type of account is very low compared to stocks and bonds, which are expected to make up the majority of an investor’s portfolio. Depending on rate and term, current rates from some banks start around 0.26% for a one-year CD.
The next step on the risk ladder is government bonds. Government bonds are issued at the federal, state and municipal levels. Federal bonds are generally the safest type of government bonds, as states and cities can experience financial problems and mismanagement that jeopardize bond repayments.
Government bonds are typically held in bond funds and target date pension funds. Although treasury bills and CDs don’t offer much interest, some government bonds offer better rates. But since they’re backed by “the full faith and credit of the United States,” you don’t have to worry too much about losing your money with this low-risk investment.
A corporate bond is a loan to a large corporation that pays you back with interest. Most individual investors do not buy bonds directly. They hold them through mutual funds and ETFs. A corporate bond generally offers better interest rates than government bonds, but it also carries a little more risk. If a company goes bankrupt, for example, bondholders may not be repaid in full.
Bonds are rated on a risk scale by a few different rating agencies. The most common scale considers AAA-rated bonds the safest. Higher-risk bonds are called junk bonds, but still offer good returns in a well-diversified portfolio. Bonds periodically pay an interest payment during the life of the bond, called a coupon, and the final principal is repaid at maturity.
Preferred stocks work like a mix of bonds and what you think of as stocks (that’s in the next section). With preferred stock, the holder receives a guaranteed payment every quarter like a bond, but there is no expiration date at the end. Preferred shareholders are paid after bondholders but before ordinary shareholders in the event of compulsory liquidation.
A downside of preferred stock is that you don’t get a vote like you do with common stock. This means that even if you are in a relatively safe and secure position, you have no say in the direction of the company’s future. In some cases, preferred stock is convertible into bonds or common stock.
Common stocks are the most popular type of stock. You might even call it the most… common. But seriously, stocks are arguably the most popular and all-around best investment for the average investor. A portfolio composed primarily of diversified common stocks tends to perform very well over time. Although stocks are a bit more volatile than bonds and investments above, over any extended period going back decades, the S&P 500 returns around 10% per year.
Buying individual stocks makes it difficult to get good diversity with a smaller portfolio, which is why mutual funds and ETFs are the best places to invest for most people. With one trade, you can buy an S&P 500 ETF that includes a small slice of 500 different stocks at a time. For most investors, diversified index funds tend to do well over a long period of time.
Options and Futures
Options give the buyer the ability to buy a stock or other asset at a specific price on a specific date. Futures contracts are like an option, but there is usually an agreement that you must make the purchase on the future date. Either way, they are very risky activities and most people should avoid them. If you want to learn more about investing here, you better read an in-depth book on the subject.
By Eric Rosenberg
The Epoch Times Copyright © 2022 The views and opinions expressed are solely those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.