Different Types of Investments
There are several options to consider if you are planning to invest money. It is of utmost importance to look into the pros and cons of all the options. This article will provide you with a slight insight into the different types of investments.
1. Stock
Stocks are the most simple type of investment. Investing in stock means that you’re buying the share of the ownership in a publicly-traded company. You can buy stocks for a variety of companies. Most of the big corporations like Google, Facebook, etc offer a chance to invest. Once you buy a stock and the price goes up, you can then sell it for a profit. There is always a risk though. If the price of the stock goes down you would end up losing your money.
2. Bonds
Buying a bond refers to lending money to an entity. The majority of the time, it is in the form of a business or a government entity. Bonds issued by private companies are called corporate bonds. On the other hand, bonds issued by the local governments are municipal bonds. The U.S. Treasury issues bonds referred to as treasury bonds. With time, you earn back the principal you spent on the bond, along with a determined rate of interest.
3. Mutual Funds
A mutual fund refers to money that comes from several investors. It is then invested collectively in many companies. Mutual funds can be managed either actively or passively. An actively managed fund always has a fund manager. Their job is to pick companies and organizations where the money is to be invested. The role of the fund managers is to try to beat the market. This is done by choosing investments that will increase in value over time.
A passively managed fund, on the other hand, works by tracking a major stock market index. The money collected by mutual funds may be invested only in stocks. However, it may also be invested only in bonds or in a mixture of the two. Mutual funds are not free of risks either. They carry the same risks as stocks and bonds, depending on where they are invested. However, the risk is somewhat less because the investments are inherently diversified.
4. Exchange Traded Funds
Exchange-Traded Funds (ETFs) are yet another type of investment that can be considered. These are somewhat similar to mutual funds because they are also a collection of investments that tracks a market index. But unlike mutual funds, that are purchased through a fund company; exchange-traded funds are bought and sold on the stock markets. The price of ETFs fluctuates throughout the trading day. That is unlike mutual funds whose value is simply the net value of the investments.
Exchange-traded funds are often recommended to investors that do not have a lot of experience because they are more diversified than individual stocks. Also, it is possible to minimize risk by choosing an ETF that tracks a broad index.
