Common types of investments
Investing is a key part of building wealth, and there are many different types of investments to consider, each with its own risk and reward profile. Here are some common types:
Stocks: Stocks represent shares in a company. When you purchase stocks, you're buying a piece of that company. If the company performs well, the value of your stocks may increase and you could make a profit by selling them. Similarly, companies often distribute a portion of their profits to shareholders through dividends, providing an additional source of income.
For example, if Jane buys 100 shares in a company at $10 per share, she's spent $1,000. If the company does well and the price rises to $15 per share, her investment is now worth $1,500.
Bonds: Bonds involve lending money to an entity like a government or corporation. In return, they agree to pay you interest over a set period and return the principal amount at the end of that period. Bonds are generally considered less risky than stocks, but potential returns are typically lower.
Mutual Funds and Exchange-Traded Funds (ETFs): These funds pool money from multiple investors to buy a diverse range of assets. They offer an easy way to achieve diversification, spreading your investments to reduce risk. For example, instead of buying individual stocks, you can buy a mutual fund or ETF that owns hundreds of different stocks.
Real Estate: Real estate investing involves buying properties for the purpose of generating a profit. This can be through rental income, appreciation in property value, or both. There are many types of real estate investments, including residential properties (like houses or apartments), commercial properties (like office buildings), and real estate investment trusts (REITs), which are companies that own or finance income-producing real estate.
Let's look at an example: suppose Jack buys a residential property for $200,000 and rents it out for $1,200 per month. He has expenses including mortgage payments, property taxes, insurance, and maintenance, costing him about $1,000 per month. After these expenses, he's left with $200 per month in positive cash flow. Over time, as rent prices increase and his mortgage balance decreases, this income grows. Plus, the property itself may increase in value, so if he sells it later, he could make a profit.
Commodities: Commodities include physical assets like gold, oil, or crops. They can provide a hedge against inflation and a way to diversify your portfolio. However, investing in commodities can be complex and risky, as prices can be highly volatile.
Retirement Accounts: Retirement accounts like 401(k)s and IRAs offer tax advantages to encourage saving for retirement. These accounts can contain a variety of investments, including stocks, bonds, and mutual funds.
Remember, diversification and understanding the risks associated with each investment type are key to building a strong portfolio. It's also wise to consult a financial advisor to help make decisions tailored to your financial goals and situation.