Here is a breakdown of the 13 most common investment types:
1. Stocks
When you buy shares of a company’s stock, you own a piece of that company. Stocks come in a wide variety, and they often are described based the company’s size, type, performance during market cycles and potential for short- and long-term growth.
Stocks may be the most well-known and simple type of investment. When you buy stock, you’re buying an ownership share in a publicly traded company. Many of the biggest companies in the country — think General Motors, Apple and Facebook — are publicly traded, meaning you can buy stock in them.
When you buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money.
Stocks and stock mutual funds often can be an important component of a diversified investment portfolio. Learn more about different types of stocks and how to assess whether a given stock is right for you.
2. Bonds
A bond is a loan an investor makes to a corporation, government, federal agency or other organization in exchange for interest payments over a specified term plus repayment of principal at the bond’s maturity date. There are a wide variety of bonds including Treasuries, agency bonds, corporate bonds, municipal bonds and more. Likewise there are many types of bond mutual funds.
When you invest in bonds and bond mutual funds, you face the risk that your investment might lose money, especially if you bought an individual bond and want or need to sell it before it matures. And bond mutual fund prices can fluctuate, just as stock mutual funds do. Risk will also vary depending on the type of bond you own.
After the bond matures — that is, you’ve held it for a predetermined amount of time — you earn back the principal you spent on the bond, plus a determined rate of interest.
The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be lower risk. There is some risk involved, of course. The company you buy a bond from could fold, or the government could default. Treasury bonds especially, however, are considered a very safe investment.
3. Investment Funds
Funds—such as mutual funds, closed-end funds and exchange-traded funds—pool money from many investors and invest it according to a specific investment strategy. Funds can offer diversification, professional management and a wide variety of investment strategies and styles. But not all funds are the same. Understand how they work, and research fund fees and expenses.
Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks companies and other instruments in which to put investors’ money. Fund managers try to beat the market by choosing investments that will increase in value. A passively managed fund simply tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500. Some mutual funds invest only in stocks, others only in bonds and some in a mixture of the two.
Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in.
4. Exchange-Traded Funds
Exchange-traded funds (ETFs) are similar to mutual funds in that they are a collection of investments that tracks a market index. Unlike mutual funds, which are purchased through a fund company, ETFs are bought and sold on the stock markets. Their price fluctuates throughout the trading day, whereas mutual funds’ value is simply the net value of your investments.
ETFs are often recommended to new investors because they’re more diversified than individual stocks. You can further minimize risk by choosing an ETF that tracks a broad index.
5. Certificates of Deposit
A certificate of deposit (CD) is a very low-risk investment. You give a bank a certain amount of money for a predetermined amount of time. When that time period is over, you get your principal back, plus a predetermined amount of interest. The longer the loan period, the higher your interest rate.
They are FDIC-insured up to $250,000, which would cover your money even if your bank were to collapse. That said, you have to make sure you won’t need the money during the term of the CD, as there are major penalties for early withdrawals.
6. Retirement Plans
Saving for retirement, and managing income once you retire, are two important aspects of personal financial management. When it comes to saving, tax-advantaged options such as a 401(k) or IRA can be smart choices. In addition to potential tax benefits, there is an opportunity for your savings to compound over time. FINRA’s Smart 401(k) resource provides valuable information about how 401(k) plans work, whether you’re just getting started or already retired.
Once you retire, the way you manage your income can mean the difference between living comfortably in retirement and running short of money down the road. Whether you are in retirement or still saving for it, there are actions you can take now to manage retirement income.
There are a number of types of retirement plans. Workplace retirement plans, sponsored by your employer, include 401(k) plans and 403(b) plans. If you don’t have access to a retirement plan, you could get an individual retirement plan (IRA), of either the traditional or Roth variety.
Retirement plans aren’t a separate category of investment, per se, but a vehicle for making investments, including purchasing stocks, bonds and funds. The biggest advantage for retirement plans — other than Roth IRA plans — is that you put in pre-tax dollars. You won’t pay taxes on the money until you withdraw it in retirement, when you will presumably be in a lower tax bracket. The risks for the investments are the same as if you were buying the investments outside of a retirement plan.
7. Insurance
Life insurance products are often a part of an overall financial plan. They come in various forms, including term life, whole life and universal life policies. There also are variations on these—variable life insurance and variable universal life insurance—which are considered securities and must be registered with the Securities and Exchange Commission (SEC). FINRA has jurisdiction over the investment professionals and firms that sell variable life and variable universal life products.
Insurance products often are developed to meet specific objectives. For example, long-term care insurance is designed to help manage health care expenses as you age. As with other financial products, insurance products can be complex and come with fees, so it pays to do your homework before you buy.
8. Annuity
An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.
Some annuity contracts provide a way to save for retirement. Others can turn your savings into a stream of retirement income. Still others do both. If you use an annuity as a savings vehicle and the insurance company delays your pay-out to the future, you have a deferred annuity. If you use the annuity to create a source of retirement income and your payments start right away, you have an immediate annuity.
The two most common types of annuities are fixed and variable. There is also a hybrid called an indexed annuity, also referred to as an equity-indexed annuity or a fixed-index annuity. Variable annuities are securities and under FINRA’s jurisdiction.
Annuities are often products investors consider when they plan for retirement—so it pays to understand them. They also are often marketed as tax-deferred savings products. Annuities come with a variety of fees and expenses, such as surrender charges, mortality and expense risk charges and administrative fees. Annuities also can have high commissions, reaching seven percent or more.
9. Options
Options are contracts that give the purchaser the right, but not the obligation, to buy or sell a security, such as a stock or exchange-traded fund, at a fixed price within a specific period of time. It pays to learn about different types of options, trading strategies and the risks involved.
An option is a somewhat more complicated way to buy a stock. When you buy an option, you’re purchasing the ability to buy or sell an asset at a certain price at a given time. There are two types of options: call options and put options and you can initiate a long or short position in either type of option.
The risks of an option is that if you purchase options you must be right on both the direction of the price and the timing of that move. If you sell options, you are taking on the risk of h the option for a specified price you were paid. Theoretically you have unlimited risk with sold options. Options are a highly advanced investing technique, and you must get approval to participate in the options market.
10. Commodity Futures
Commodity futures contracts are agreements to buy or sell a specific quantity of a commodity at a specified price on a particular date in the future. Commodities include metals, oil, grains and animal products, as well as financial instruments, precious metals and currencies. With limited exceptions, trading in futures contracts must be executed on the floor of a commodity exchange.
The Commodity Futures Trading Commission (CFTC) is the federal government agency that regulates the commodity futures, commodity options, and swaps trading markets. Anyone who trades futures with the public or gives advice about futures trading must be registered with the National Futures Association (NFA), the independent regulator for anyone who trades futures with the public.
Commodities investing runs the risk that the price of the product will go down quickly. For instance, political actions can greatly change the value of something like oil, while weather can impact the value of agricultural products.
11. Real Estate
Real estate is one of the oldest and most popular asset classes. Most new investors in real estate know that, but what they don’t know is how many different types of real estate investments exist.
It goes without saying that each type of real estate investment has its potential benefits and pitfalls, including unique quirks in cash flow cycles, lending traditions, and standards of what is considered appropriate or normal, so you’ll want to study them well before you start adding them to your portfolio.
The most common real estate investments are rental property, vacation rentals, fix-and-flip projects, and commercial real estate. However, investing in REITs, crowdfunding, and tax liens can also be good options.
12. Cryptocurrencies
Digital assets like cryptocurrencies and ICOs continue to evolve and spark interest from Main Street investors. With billions of dollars raised in ICO financings and over a thousand different cryptocurrencies currently available, these rapidly changing markets are tempting for investors. It is also difficult for most individual investors to make sense of these complex investment products and to determine the risk levels associated with them.
Cryptocurrencies are a fairly new investment option. Bitcoin is the most famous cryptocurrency, but there are countless others. Cryptocurrencies are digital currencies that don’t have any government backing. You can buy and sell them on cryptocurrency exchanges and some retailers will even let you make purchases with them but overall at this point you are hoping the next person is willing to pay more than you did.
Cryptos often have wild fluctuations, making them a very risky investment.
13. Art and Collectibles
Investing in an art and collectibles is an alternative way to build long-term wealth.
An art investment is all yours – the management, care, and storage are your responsibility. Enjoyment Value. Many art investors are collectors first and investors second. Fine art is an asset that can be displayed and appreciated. A collectible is an item that is worth far more than it was originally sold for because of its rarity and/or popular demand. Common categories of collectibles include antiques, toys, coins, comic books and sports memorabilia. It can be easy to buy but sometimes hard to sell as the markets can become illiquid.
Also, as appreciating assets, you are not being paid to hold them and sometimes can have expenses in storing and caring for the items.
