The investment options you choose depend on your goals, risk tolerance and time horizon. You can diversify your investments, or put the bulk of your savings in certificates of deposit (CDs) or high-yield savings accounts for easier access to cash.
Exploring the different types of investment products and their potential returns can help you build a diversified, tailored investment portfolio.
Stocks
Stocks, also known as equities, are ownership stakes in publicly traded corporations. They can provide investors with a higher return than savings accounts or bank fixed deposits, but they aren’t without risk.
While stocks can be volatile and may decline in value during any given week, month or year, history has shown that those who invest for the long term are often rewarded.
There are two main types of stocks, common stock and preferred stock. Common stockholders have voting rights and receive dividend payments while preferred shareholders have priority over common stockholders in the event of a company liquidation. Investors can further divide stocks based on the size of a company, with large-cap companies having the highest potential for growth and small-cap companies being speculative in nature. Many stocks also pay regular cash dividends to their shareholders, which can help offset some of the volatility that comes with investing in stocks. The best stocks will fit your financial goals, investment horizon and level of risk tolerance.
Bonds
Generally considered to be safer investments than stocks, bonds offer investors a guaranteed return on their investment. They also provide a steady source of income and often yield higher returns than savings accounts or certificates of deposit (CDs).
Bonds are issued by private companies and government agencies. Their riskiness is based on the financial strength and creditworthiness of the issuer. They’re backed by a promise to repay principal at maturity and may pay interest at fixed rates or variable rates.
Investors can buy individual bonds through brokerage firms or invest indirectly in bonds through mutual funds or exchange-traded funds (ETFs). Regardless of the investment type, diversification is important to help reduce risks and enhance potential returns. Individuals can build a diversified portfolio by considering their own unique factors, including investing goals and risk tolerance, as well as tax considerations.
Mutual Funds
Mutual funds are a popular investment option and may provide an easy way to diversify your portfolio. But be sure to understand their fees and expenses, as these can eat into your potential return.
Mutual fund companies pool the money of investors and use it to purchase a range of investments, such as stocks, bonds and short-term money market instruments. Investors receive proportional shares of the profits and income generated by the funds.
A mutual fund can earn income from dividend payments on stock and interest on bonds. It typically passes these earnings to shareholders in the form of a distribution. It can also generate returns when it sells securities that have appreciated in value, known as a capital gain.
Mutual funds can be categorized by their investment objectives, such as growth or income, and by the types of assets they own. You can even find specialized funds that track specific market indexes or take a balanced approach by investing in both stocks and bonds.
Real Estate
Real estate investment has long been a popular option for investors looking to diversify their portfolios and build wealth. But how does it compare to other popular investment options, like stocks and bonds?
Real estate offers some unique advantages that other investment opportunities do not. For one, it’s tangible, which allows investors to see and experience the property for themselves. Additionally, real estate is often purchased with debt, which magnifies returns and reduces risk. However, it’s important to note that real estate investments are still subject to the same market fluctuations as other investment types.
Investing in real estate can be challenging for new investors, as it requires time and expertise. Fortunately, modern technology has made it possible for investors to start small by investing in rental properties through companies like Arrived. These platforms provide access to diversified real estate opportunities with attractive potential returns.
