Different types of investments and how they work

Nowadays, everyone wants to make their money work for them. Gone are the days when people would put it all in the bank and collect their 0.5% interest, the modern investor needs much higher returns than that!

There are so many options for you to invest in these days that it can be hard to keep track of them all. But don’t worry, we’re here to break down all the different types of investments you’ll come across – from bonds to stocks to commodities, and much more!

Stocks and Shares

Let’s start with stocks and shares. Most people will be familiar with these already but for the uninitiated, these investment vehicles allow you to buy a small fraction of a publicly-traded company, which is by definition a copmpany organized stocks. Those would include companies like Amazon or Google and on the other hand we have private companies held under private ownership, like IKEA, Platincasino or Deloitte.

Going back to stocks and shares, when investing on them, if the value of the company goes up, the value of your stocks/shares also goes up but if the value goes down, then so does the value of your investments. Let’s have a look at some of the advantages and disadvantages of stocks and shares:

Advantages

Can be paid dividends from stocks when the company is doing well.
The market is generally stable so losses don’t get out of hand.

Disadvantages

Due to market stability, the ROI of stocks and shares is low.
Most investments require you to hold them for years to see a large ROI.

Commodities

We all love gold and precious stones, mining them used to be a job seeked after although nowadays people dont mine like the ones characterised in the Gold Rush Slot.

But what is gold if not a commodity? And a commodity is another term for a basic good that has a real-world equivalent, such as oil, gold, or natural gas. The higher the demand is for these goods, the more the price increases which means the value of your investment also increases – making it a gamble.

Advantages

They’re a good investment to hold during high levels of inflation.
Commodities are very easy to buy and sell as the market is 100% liquid.

Disadvantages

Depending on the specific commodity you may be exposed to geopolitical factors not present in other investments.
The amount of leverage available for commodities is high which can lead to large losses.

Bonds

Bonds are usually a person’s first introduction to investment. You can buy them for children, so most parents will invest in them for their kids as they’re growing up. Bonds are fixed-income investments that represent a loan made by an investor to a borrower (usually a corporate or governmental borrower). That loan is then repaid to the bondholder with interest over a fixed period.

Advantages

You receive a regular income through investment payments.
The market is very stable so losses don’t get out of hand.

Disadvantages

Due to market stability, the ROI of bonds is very low.
Most investments require you to hold them for years to see a large ROI.

Mutual Funds

A mutual fund is an investment that is made up of a pool of money that has been collected to invest in other financial instruments such as bonds, stocks, and commodities. These funds are managed by professional money managers whose sole job is to invest that money to earn capital gains for their investors. Each mutual fund will have a prospectus that potential investors can read through that will outline their investment strategy as well as their previous returns.

Advantages

Investment is managed by a professional money manager.
Your money is diversified among many different markets instead of being all pooled into one.

Disadvantages

The fees for investing in a mutual fund are much higher than other investments.
A return on investment isn’t guaranteed and is subject to market fluctuations.

Exchange-Traded Funds (ETFs)

An ETF is similar to a mutual fund in that it is a pool of money that is used to invest in other investment vehicles but ETFs are often focused on one particular asset/commodity/sector/index. Also unlike mutual funds, ETFs can be bought and sold in the same way that stocks/shares can. The very first ETF was the SPDR S&P 500 which tracks the S&P 500 Index and is still traded to this day.

Advantages

You can manage your risk through diversification.
There are lower fees when buying an ETF compared to a mutual fund.

Disadvantages

ETFs that are actively managed still have high fees.
The liquidity isn’t as high as in other markets which hinders buying and selling.

Retirement plans

The majority of people turn to investing as a way to make sure they have enough money for when they retire. If this is the case for you, why not look into dedicated retirement plans that will save money for you to access when you stop working. Putting away a little bit of money each month will add up over the years and you can leave yourself a nice little nest egg.

Advantages

Gives you the option for long-term savings if that’s your goal.
Once your money becomes available you can choose whether you receive a lump sum or regular payments.

Disadvantages

It can be hard to anticipate exactly how much you need for the future so choosing the amount to save is tricky.
When you receive your money after retirement it becomes taxable.

Real Estate

Most people dream of owning their own home, but for some people real estate is more than just a home – it’s an investment tool. Property and land are things that will always be a necessity, so owning real estate is often a solid investment no matter the state of the market. However, even in real estate investment, there’s no guarantee that you will make money.

Advantages

Generally appreciates in value over time.
Can generate a steady source of income if rented out.

Disadvantages

Requires a large amount of capital upfront.
Transaction costs/taxes are high.

Cash

Investing in cash is what most people do when they save in the short term. If they’re looking to book a holiday or upgrade their boiler, it’s easy to put a certain amount of cash aside each month/week to reach their goal. However, as a long-term investment, it is vulnerable to inflation, and should not be used as a long-term solution to storing your money.

Advantages

Great for short-term savings.
Your money is readily available whenever you need it.

Disadvantages

Cash is vulnerable to inflation.
You receive no added benefit from holding cash as you would from holding other investments.

Certificates of Deposit (CDs)

A certificate of deposit is an investment offered by a bank or credit union that offers its investors a rate of interest in exchange for depositing a lump sum of money for a predetermined period. During this time the investor is not allowed to add to or withdraw from the lump sum until the predetermined period is over, else they will face certain penalties.

Advantages

CDs are a very safe form of investment with little risk of losing money.
Guaranteed money in the form of the interest rate.

Disadvantages

If the interest rate offered is below the rate of inflation then investors will “lose” money when adjusted for inflation.
The investment must be left for a predetermined period of time and there are fees for wanting to withdraw your money early.

Conclusion

As you can see there are plenty of investment types for you to consider when deciding where to put your money. It all depends on exactly what you’re looking for from an investment and how high your risk tolerance is. Having a good handle over your money will set you up for the future. There are even more forms of investment that we haven’t listed here, such as cryptocurrency, options, and annuities, so do shop around before deciding how to invest your money!