There are lots of ways that you can invest in to grow your money, and it could be really intimidating when you are starting out.
We will go over some of the most popular types of investments that you can invest in: Stocks, Bonds, Mutual Funds, Exchange-Traded Funds (ETF), Certificates of Deposit (CDs), Real Estate, and Crypto.
Hopefully, this post will help narrow down some investment types that you would be comfortable with exploring more about!
Do note that we’re not financial advisors, so make sure to do a lot of research and talk to a financial advisor!
- Stocks
- Bonds
- Mutual Funds
- Exchange-Traded Funds (ETF)
- Certificates of Deposit (CDs)
- Real Estate
- Cryptocurrencies
Stocks
Stocks are probably one of the most popular and simple investments out there. When you buy a stock, you own a part of the company, and you become a shareholder. For example, if you buy a share of Apple stock (AAPL), you now own a very small percentage of Apple!
There are 2 ways for you to make money through stocks:
The first way is through selling stocks. You buy shares of companies that you think would become more valuable in the future, and once they do, you would sell the shares that you own at a higher price than when you bought them; a simple buy-low-sell-high concept.
The second way to make money with stocks is through dividends. Dividends are a certain amount of money that is paid out regularly (monthly/quarterly/annually, etc.) by companies to shareholders. It is a way for companies to distribute a portion of the companies’ profits back to the shareholders. In other words, you are getting some of your money back in the form of dividends, and this would exponentially increase year over year (snowball effect).
The risk with investing in stocks is that the stock market is volatile. This means that the stock that you invested in could go down, bringing your investment with it.
Bonds
A bond is like a loan that you are lending out to a company or government. When you buy a bond, you are agreeing to let a company/government borrow your money and pay you back with a fixed interest rate after a certain amount of time. That is how you typically make money by buying bonds.
Buying bonds is generally less risky than buying stocks, but this comes with much lower returns. With that being said, there are risks involved with it.
The main risk when buying bonds is that the company/government could default. However, the U.S Treasury bonds are considered very safe because they are backed by the “full faith and credit” of the U.S. government.
Mutual Funds
If picking stocks and/or bonds sounds too risky, then an alternative would be mutual funds.
A mutual fund is a pool where many investors put in their money and invest in a number of companies at the same time. The pooled money would then be managed/allocated by a professional manager to certain stocks/bonds. As the value of the underlying stocks goes up, so does the value of the fund, which investors could sell for a profit.
Mutual funds have the same risks as stocks and bonds, depending on what the funds invest in. However, mutual funds are considered less risky as they usually consist of many stocks/bonds, which increases diversification.
Note that mutual funds have an annual fee (expense ratio) that you’d have to pay to invest in it.
Exchange-Traded Funds (ETF)
Exchange-traded funds (ETF), or index funds, are similar to mutual funds in the sense that it is a basket of investments.
Unlike mutual funds, which are usually actively managed, ETFs are generally passively managed and aim to track an index. For example, an ETF that aims to track the performance of the S&P 500 (top 500 companies based on market cap) would hold stocks of the top 500 companies.
Also different from mutual funds, ETFs are traded on the stock exchanges. Because of this, their price fluctuates more than mutual funds.
ETFs are considered to be less risky than stocks because when you buy an ETF, you are buying all the stocks underlying the ETF, which increases your diversification.
They also have expense ratios, but they’re generally much cheaper than mutual funds. This is why ETFs are generally recommended to new investors to start out.
Certificates of Deposit (CDs)
With a CD, you are giving a bank an amount of money for a certain amount of time, and at the end of the term, the bank would give your money back with a predetermined interest.
Generally the longer the term, the higher the interest rate. The interest rate is usually higher than a normal savings account as well.
The risk of a CD is that you cannot withdraw your money before the term ends (except if you’re willing to pay a penalty fee), which makes it very illiquid.
CDs are considered to be less risky as they are FDIC-insured up to $250,000, which means that your money would be reimbursed by the FDIC in the case that the bank fails.
Real Estate
Another popular alternative for investing would be real estate. You can invest in real estate by buying commercial and/or residential properties.
When the value of the properties goes up, you can sell your properties and collect your profits. You can also rent out your properties and collect monthly rent, which acts as an additional stream of income. Real estate is a great investment, but it generally requires a large amount of money to start and more physical labor.
With that being said, there are ways to invest in real estate even if you don’t have the capital.
You can alternatively invest in REITs (Real Estate Investment Trusts). REITs are companies that own/manage a wide variety of income-producing real estate. When you buy a REIT, you are indirectly investing your money into the properties that the REIT owns/manages. REITs are traded on the stock exchange similar to stocks, and it also has the same risks as stocks.
Cryptocurrencies
Cryptocurrencies are properly one of the riskiest investments that you can make, and it has picked up quite a lot of steam in recent years.
When talking about crypto, most people think of Bitcoin. Although Bitcoin is the most well-known crypto out there, there are many other cryptocurrencies, like Ethereum, Cardano, etc.
A cryptocurrency is a digital/virtual currency; a digital asset based on a decentralized network. “Decentralized” means that it is controlled by any central authorities (e.g. government). This allows it to be much faster and cheaper when it comes to money transfers, and there is less risk of it collapsing because it is decentralized, unlike other “centralized” currencies (e.g. US dollar).
Why are these considered risky? Well, it’s because cryptocurrencies are extremely volatile, much more than stocks. Not only that, due to their “decentralized” nature, cryptocurrencies are not backed by any public or private entities (think companies and government), which means that if anything happens to your crypto, there is nothing to help you in terms of getting your money back.
With that being said, cryptocurrencies present an extremely high return potential (e.g. Bitcoin’s average annual rate of return is around 200% since its inception in 2010). For those who prefer the high-risk high-reward kind of investment, cryptocurrencies are there for you to explore (at your own risk, of course)!
Bottom Line
And with that, we have covered some of the most popular investments that you can make! It is true that there are risks when it comes to investing, but we are willing to take those risks in order to build wealth and achieve our FIRE goal 🙂