With the unknown comes uncertainty. You aren’t knowledgeable on a specific topic, so you stay away from it. This is often the case when it comes to investing, although it shouldn’t be! Investing is probably one of the best ways to build true wealth over time. With that being said, you should understand the process behind investing and common investment types.
Since investing comes with a lot of uncertainty, it can be scary. However, that should not be reason enough to stay away. Start sharpening your knowledge on investing! It really isn’t as scary as it sounds. You can make a lot of money over time, and if you start early enough, you don’t even have to put up that much to see a profit. Check out the Beginner’s Guide to Investing with Little Cash to learn more.
I want to help as many women as possible become more knowledgeable about investing and the benefits it can bring. I am by no means an expert, but I have a good amount of experience. To start, it’s best to understand what types of investments a person can purchase. Keep reading for 5 common investment types everyone should be aware of.
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A stock is a form of investment that gives you partial ownership of a publicly traded company. A stock, also known as shares or equity, indicates a claim on the company’s assets and earnings.
The more of a company’s stock you own, the more of an ownership stake you have in that company. Holding stock in a company makes you a shareholder of that company. This means that you are entitled to your share of the company’s earnings, as well as any voting rights that may come with it.
There are a few benefits to holding stocks outright. One benefit is the ability to buy and sell as you please. You would leverage a discount brokerage firm like Charles Schwab or E-Trade. Another benefit is that some stocks come with dividends. Dividends are profits paid out to shareholders on a quarterly or annual basis. It’s not a form of investment, it’s a form of cash!
The number one drawback to investing is stocks is the volatility, or the rapidness of unexpected change. A stock price can go up or down very quickly. This means you could make or lose money very quickly. There are people who trade stocks on a daily basis. They have made a career out of the volatility of the stock market.
To help you keep calm during times of change, think about your strategy. Are you looking for short-term profits or long-term profits? If short-term, once you reach the amount you want or need, sell the stock. If long-term, be prepared to ride through the up and down waves.
A bond is a form of debt, and you are the credit issuer. Essentially, when you buy a bond, you are giving a loan to the government, a company, a city, etc. in exchange for a promise to pay at a specific date, with a pre-set interest rate until the bond is paid back.
The interest rate is determined when the bond is purchased. The interest payments, also known as coupons, are paid on a consistent basis until the bond reaches its end date. Once the bond matures, you will be paid in full for the original purchase price.
Bonds are significantly less risky than stocks, but there is definitely some form of risk. It’s very possible that you purchase bonds from a company that goes out of business or can’t pay you back. Typically, the less credit-worthy issuer will pay a higher interest rate on the bond. Bonds with unusually high interest rates are referred to as “junk” bonds; due to the fact that the issuer may not pay out when the bond matures.
The safest bonds are those issued by the U.S. Government. These bonds are called Treasury bonds and are considered to be risk-free. These bonds will yield a smaller interest rate, but they are guaranteed by the government.
Bonds can be a good form of investment because they allow you to generate more interest than what you would likely make with your money sitting in a checking or savings account. If you have a lump sum of money you won’t need in the near future, you could make more in interest than keep your money in a bank account.
#3 Funds (Mutual, Index, and ETFs)
A mutual fund is a form of investing that allows you to place your money in a professionally managed portfolio that could contain stocks, bonds and other forms of investments. This allows the investor to diversify their investments without the hassle of purchasing or selling individual shares or bonds. The portfolio is also managed by a professional at a company like Vanguard or Fidelity.
An index fund is a specific type of mutual fund with a portfolio created to match or track the components of a market index, such as the S&P 500. According to Investopedia, “an index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets.”
An ETF, or exchange-traded fund, is a marketable security that tracks an index (like the S&P 500), a commodity (like gold), bonds, or a portfolio of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock in the stock market.
Investopedia states, “ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.”
An annuity is a form of investment usually leveraged for retirement. An annuity is a contract between you and an insurance company, bank, or brokerage firm, that requires the insurer to make payments to you.
You buy an annuity by making either a single payment or a series of payments. Similarly, your payout from the insurer may come either as one lump-sum payment or as a series of payments over time. People typically leverage annuities to ensure consistent payments are received during retirement.
There are two phases to annuities, the accumulation phase and the payout phase. During the accumulation phase, you make payments that may be split among a variety of investment options. During the payout phase, you get your payments back, along with any investment income and gains. You may take the payout in one lump-sum payment, or you may choose to receive a regular stream of payments, generally monthly.
#5 401k and IRA
A 401k and IRA are both a form of investing for retirement. They do have some differences, but they are very similar in that you make deposits into a 401k or IRA, which are then invested. Over time, the deposits and investments grow on top of each other. Then, you pull the money out at retirement. If you take money out before retirement, you are subject to taxes and fees.
A 401k is a retirement plan that is sponsored by your employer. This allows employees to place a percentage of pre-tax or after-tax funds from their paycheck into the retirement account. Most 401ks allow the owner to determine where the money goes. Typically, users can pick from a variety of stocks, bonds and money market investments.
An IRA, or Individual Retirement Account, is an individual plan that allows users to save money for retirement with tax advantages. An IRA is set up at a financial institution and allows individuals to save on a tax-free or tax-deferred basis.
According to Fidelity, “Many financial experts estimate that you may need up to 85% of your pre-retirement income in retirement. An employer-sponsored savings plan, such as a 401k, might not be enough to accumulate the savings you need. Fortunately, you can contribute to both a 401k and an IRA.”
Related: Easy Ways to Start Investing Now
Now that you know a few of the most common types of investments, you can start thinking about how you can start investing! As I mentioned earlier, investing is one of the best ways (if not the best way) to build true wealth. So, what’s stopping you from investing? What do you currently invest in? Post a comment below to share!