So you’ve saved some money and are looking for ways to invest it. There are SO many options available. And although its overwhelming to cover them all, here is a summary of the most common ways to invest. Here, we’ll go over the brief pros and cons of each investment, starting with the least risky and working our way toward riskier investments.
Savings Account. These are the least risky way to invest your money. However, they offer the lowest rates of return of any investment you’ll find. They are insured by the federal government so you are guaranteed not to lose money. You can open a savings account at any bank or credit union.
Money Market. Money market accounts are a like a mutual fund of ultra safe investments. They offer a slightly higher return than a savings account and slightly higher risk. You can invest in money markets through some banks and through almost any brokerage account.
CDs. Certificates of Deposit are similar to savings accounts, but require you to commit to 1, 3, 6, or 12 months. In return for the extra commitment, you recieve a slightly higher rate of return. You can purchase a CD through most banks, credit unions and from some brokers.
Savings Bonds. Savings bonds are purchased from the government. They are easy to purchase because they were formed to encourage average people to save. Savings bonds offer slightly higher rates of return than savings, money market and CD accounts, however some mature after many years. You can buy a savings bond online or through a bank.
Government Bonds. Government bonds and treasury bonds carry little risk and offer rates higher than savings bonds and lower than corporate bonds. The longer duration bond you buy the higher the return, but rates typically are much lower than stock returns and corporate bonds. You can buy government bonds through a broker or in a mutual fund.
Corporate Bonds. Corporate bonds are debts issued from a company. The better the credit of the company, the lower the rate of interest. Lower quality companies’ debt is known as junk bonds and offer higher returns. Corporate bonds can be purchased through brokers or as part of a bond mutual fund.
Stocks. Stocks represent the equity in a company. Buying a stock is the same as buying a partial ownership in a company. Since companies vary in quality and risk, so do their stocks. Some pay dividends and some grow fast. Some are high risk and some are not. Regardless, stocks are riskier than bonds, because a company has to pay its debtors before they can pay their owners. With that said, stocks offer consistent high returns over the long run, but can swing wildly during market turmoils. Stocks can be purchased through a broker.
Mutual Funds and ETFs. Mutual funds are lower risk than individual stocks because they own hundreds or thousands of different stocks. However, you can buy mutual funds that specialize in high risk categories or geographies, so mutual funds can range from slightly risky to very risky. ETFs are like mutual funds except that they are traded on an exchange and can represent assets instead of actually buying them. You can buy mutual funds and ETFs at a broker or directly from a mutual fund company.
Real Estate / Income Property. You can do your research and invest in your own income property, apartment building, duplex or commercial property. This takes a lot of work, due diligence and a long term commitment. The risk is fairly high because of the leverage and potential change in neighborhoods, however, not typically as risky as stocks. Real estate investments are less liquid, which also adds to riskiness. You can contact a real estate agent or buy real estate on your own behalf. Before you buy real estate you should learn about current market trends.
Real Estate Funds. REITs and other real estate mutual funds offer some of the benefits of owning real estate without all the risk and liquidity issues. REITs are required to pay out most of their income, so they are almost like dividend stocks. They are less risky than buying real estate yourself but because your paying for all the legal fees, management fees and listing fees, the return may not be as high.
Gold and Commodities. Gold is a popular investment because it goes up when the stock market goes down and people are fleeing to safety. It also goes up with inflation. However, gold frequently hits bubbles and can be very risky. Other commodities and precious metals are similar. Their returns are very volatile (risky) and you can buy them in a mutual fund or through a broker.
Hedge Funds. Hedge funds are for high net worth individuals (several million dollars) and offer riskier investments in start up companies or private companies. The also allow the fund managers to use leverage and do not require the disclosure that mutual funds require. They are very risky but can offer very high returns. You can only buy hedge funds from a hedge fund company. Many brokers have relationships with hedge funds so you can sometimes invest through a broker.
Your Own Business. Another way to invest your money is to start your own business. Since most new business go out of business in less than 5 years, this may be one of the riskiest ways to invest your money. However, small business owners are also the wealthiest group of individuals in the world (if they are successful). Starting a business takes a lot of due diligence, a great idea, and lots of help setting up.
Stock Options. Probably the riskiest way to invest is by buying stock options. These are options that pay you if the underlying stock goes up or down (depending on which option you bought). They only last for a few weeks or months, so if you make the wrong bet you lose all of your money. You can use stock options to hedge your other investments and they can be bought through a broker.