If you are starting out in investing, you must know about the different investment options available to you. Each option comes with its own characteristics, and potential benefits and risks.
Let's look at some common choices that work well for beginners.
1. Stocks
Stocks are a popular choice for many investors. According to a Gallup poll, about 61% of Americans own stocks in some way. When you buy a stock, you're buying a small piece of a company. This means you own a part of that business and can benefit from its success.
How it Works
When you invest in stocks, you're hoping to make money in two main ways. First, you can profit if the stock price goes up. For example, if you buy a stock for $50 and its price rises to $60, you've made $10 per share. You can sell your shares and pocket the difference. Second, some companies pay dividends, which is like getting a small chunk of the company's profits regularly.
Pros
Potential for high returns over time
Chance to earn regular income through dividends
Easy to buy and sell (high liquidity)
Opportunity to own part of innovative companies
Can help your money grow faster than inflation
Cons
Prices can be very unpredictable (volatile)
Risk of losing money if stock prices fall
Requires time and effort to research companies
Can be stressful when the market is down
No guarantee of making money
How to Invest
To buy stocks, you need a brokerage account. This is like a special bank account for investing. You can open one online pretty easily these days. Once you have an account, you can buy and sell stocks whenever you want during market hours.
2. Bonds
Bonds are another option. They're like loans you give to companies or the government. In return, you get paid interest. Bonds are usually safer than stocks, but they don't usually grow as much. The yield on a ten-year U.S. government bond was 4.2 percent as of June 2024.
How Bonds Work
Bonds come in different flavors. Government bonds are usually the safest, while corporate bonds might pay more interest but come with more risk. When you buy a bond, you're promised two things:
Regular interest payments (usually every six months)
The return on your original investment when the bond matures
For example, if you buy a $1,000 bond with a 5% interest rate (also called the coupon rate) and a 10-year term, you'll get $50 each year in interest. After ten years, you'll get your $1,000 back.
Pros
Provide steady, predictable income
Generally lower risk than stocks
Can help balance out a portfolio
Some bonds offer tax advantages
Typically less volatile than stocks
Cons
Usually offer lower returns than stocks over the long term
Value can decrease when interest rates rise
May not keep up with inflation
Some bonds can be less liquid than stocks
Default risk (though rare for government bonds)
How to Buy Bonds
You can buy bonds through a broker, just like stocks. You can also buy some government bonds directly from the U.S. Treasury through their TreasuryDirect website. Many investors choose bond mutual funds or ETFs for easier diversification.
3. Mutual Funds
If you want to spread your money across many stocks or bonds, you might like mutual funds. Mutual funds are like big baskets of investments. When you buy into a mutual fund, you're pooling your money with other investors to buy a mix of stocks, bonds, or other assets. It's a way to invest in many different things at once, even if you don't have a lot of money.
Mutual funds can have fees that eat into your returns. At the end of 2023, the average fee for actively managed stock mutual funds was 0.96%.
How Mutual Funds Work
Mutual funds come in many types. Some focus on stocks, others on bonds, and some mix both. There are also funds that focus on specific industries or countries.
When you invest in a mutual fund, you're buying shares of the fund. The fund manager then uses the money from all investors to buy a variety of investments. The value of your shares goes up or down based on how well these investments perform.
There are two main ways mutual funds can make you money:
The value of the investments in the fund goes up, making your shares worth more.
The fund earns money from dividends or interest, which it can pass on to you.
Pros
Professional management of your investments
Easy diversification across many assets
Can start investing with relatively small amounts
Highly regulated for investor protection
Variety of options to match different goals
Cons
Fees can eat into your returns
Less control over exactly what you're investing in
Potential tax inefficiency in taxable accounts
May underperform compared to individual stock-picking
Can't trade during the day like stocks
How to Invest in Mutual Funds
Investing in mutual funds is pretty easy. You can start by opening an account with a brokerage firm or bank that offers investments. Popular choices include companies like Fidelity, Vanguard, and Charles Schwab. Many banks also offer investment accounts. You can also invest in mutual funds through employer-sponsored retirement plans like 401(k)s.
Once you have an account, you can choose a fund and buy shares. You can usually do this online or by talking to someone at the brokerage.
4. Exchange Traded Funds (ETFs)
Exchange-traded funds, or ETFs, are similar to mutual funds, but you can buy and sell them just like stocks on the stock market. They often have lower fees than mutual funds and are easy to buy and sell. In 2023, the average expense ratio for stock ETFs was just 0.11%.
Over the past few years, ETFs have become extremely popular. At the end of June 2024, the U.S. ETF industry reached a new record high of $9.18 trillion, surpassing the previous record of $9.00 trillion at the end of May 2024. The value of assets has increased 13.1% YTD from $8.11 trillion at the end of 2023.
How ETFs Work
ETFs work by tracking a specific group of investments called an index. For example, an S&P 500 ETF tries to match the performance of the 500 largest U.S. companies. When you buy an ETF share, you're essentially buying a small piece of all the investments in that index.
Unlike mutual funds, which are priced once a day, ETF prices change throughout the trading day. This means you can buy or sell ETFs whenever the stock market is open, just like individual stocks.
Pros
Often have lower fees than mutual funds
Can be bought and sold throughout the trading day
Offer easy diversification
Many ETFs are tax-efficient
Allow you to invest in specific sectors or themes
Cons
May have trading costs each time you buy or sell
Some niche ETFs can be risky or have high fees
Might not exactly match the index they're tracking
Can be overwhelming with so many choices
Intraday trading might tempt some investors to trade too often
How to Invest in ETFs
You can buy ETFs through most brokerage accounts, just like you'd buy stocks. Many online brokers now offer commission-free trades on ETFs, which makes them even more accessible to everyday investors.
To get started, you'll need to open a brokerage account if you don't already have one. Then, you can search for ETFs that match your investment goals. Many investors start with broad market ETFs that track major indexes like the S&P 500 or total stock market.
5. Real Estate
Real estate can be a good way to diversify your investments. Real estate investing means putting your money into property. This could be anything from buying a house to invest in large commercial buildings. It's a way to own something physical that can grow in value over time and potentially provide regular income.
How Real Estate Investing Works
When you invest in real estate, you're buying property with the hope that it will increase in value. There are several ways to make money from real estate:
Appreciation: This is when the property's value goes up over time. For example, a house you buy for $200,000 might be worth $250,000 in a few years.
Rental Income: If you buy a property and rent it out, you can earn money from tenants every month.
Related Business: Some investors make money by running businesses related to real estate, like property management or real estate development.
Pros
Potential for steady income through rent
Property values often increase over time
Can offer tax benefits
Provides a tangible asset you can see and touch
Can be a hedge against inflation
Cons
Requires a large amount of money upfront
Can be difficult to sell quickly (not very liquid)
Ongoing costs for maintenance and property taxes
Managing tenants can be time-consuming
Local market conditions can greatly affect value
How to Invest in Real Estate
Buying property directly is the most straightforward way. This could mean purchasing a house to rent out, or buying commercial property. It requires a significant amount of money and often involves taking out a mortgage.
If you don't want to buy property directly, you can invest in Real Estate Investment Trusts (REITs). These are companies that own and manage properties. You can buy shares in REITs just like stocks. They often pay good dividends, but their value can change with the real estate market. As of 2024, U.S. REITs own over $4 trillion of gross real estate with public REITs owning $2.5 trillion in assets.
6. Certificates of Deposit (CDs)
If you want a very safe place to keep your money, Certificates of Deposit (CDs) might be for you. You agree to leave your money in the bank for a set time, and in return, you get a guaranteed interest rate. As of August 2024, the average 1-year CD paid about 1.99% interest.
CDs are considered very safe investments. They're usually insured by the FDIC for up to $250,000, just like regular bank accounts.
How CDs Work
When you open a CD, you're making a deal with the bank. You promise to keep your money in the account for a set time – maybe six months, one year, or even five years. The bank promises to pay you a fixed interest rate during this time.
If you need to take your money out before the CD matures (ends), you usually have to pay a penalty. This penalty is often a few months' worth of interest.
Pros
Higher interest rates than regular savings accounts
Very safe – FDIC insured up to $250,000
Fixed-rate, so you know exactly how much you'll earn
Can help you save for specific goals
No risk of losing money (unless you withdraw early)
Cons
Money is tied up for the CD term
Early withdrawal penalties if you need the money sooner
Interest rates might be lower than inflation
Miss out on potentially higher returns from other investments
Interest is taxable unless the CD is in a tax-advantaged account
How to Invest in CDs
You can open a CD at most banks and credit unions. Many online banks offer CDs, too, often at higher rates than traditional banks.
To open a CD, you'll need to choose how long you want to invest your money and how much you want to put in. There's usually a minimum deposit, which can range from $500 to $10,000 or more.
Some people use a strategy called a "CD ladder." This means opening several CDs with different maturity dates. This way, money becomes available at regular intervals, which you can either use or reinvest.
7. Cryptocurrencies
Cryptocurrency is a riskier type of investment. It is a digital or virtual currency that uses cryptography for security. The most well-known cryptocurrency is Bitcoin, but there are thousands of others, often called "altcoins." Cryptocurrencies can grow in value, but they can also lose value quickly.
Approximately 40% of American adults now own cryptocurrency, compared to 30% in 2023. About 63% of current crypto owners plan to purchase more cryptocurrency in the next year.
How Cryptocurrency Investing Works
When you invest in cryptocurrencies, you're buying digital tokens or coins. These aren't physical coins – they exist only as entries in a digital ledger called a blockchain.
You can buy cryptocurrencies on special exchanges, much like you'd buy stocks on a stock exchange. You store your cryptocurrencies in a digital wallet, which can be online, on your computer, or on a special hardware device.
Pros
Potential for high returns
24/7 trading
Blockchain technology has many potential uses
Can be a way to diversify your investments
Some see it as a hedge against inflation
Cons
Extremely volatile prices
Not widely accepted as payment yet
Regulatory uncertainty in many countries
Risk of hacks or losing access to your wallet
Environmental concerns about energy use in mining
How to Invest in Cryptocurrencies
To invest in cryptocurrencies, you first need to choose an exchange. Popular ones include Coinbase, Binance, and Kraken. You'll need to set up an account and verify your identity.
Once your account is set up, you can transfer money to it and use that to buy cryptocurrencies. You can start with small amounts – you don't need to buy a whole Bitcoin, for example.
After buying, it's important to transfer your cryptocurrencies to a secure wallet if you're planning to hold them long-term. Many investors use hardware wallets for extra security. Some traditional brokers and investment apps now offer cryptocurrency trading too.
8. Commodities
Commodities are basic goods used in commerce. These can be things like oil, gold, wheat, or coffee beans. When you invest in commodities, you're betting on the future price of these goods. In 2024, the nominal value of the Commodities market is expected to reach US$121,200.00bn.
How Commodity Investing Works
Investing in commodities is different from buying stocks or bonds. Instead of owning a piece of a company, you're dealing with physical goods. Most people don't actually buy and store barrels of oil or bushels of wheat. Instead, they use financial products that track commodity prices.
There are a few ways to invest in commodities:
Futures contracts are agreements to buy or sell a specific amount of a commodity at a set price on a future date. These are complex and are usually used by professional traders.
You can also invest in stocks of companies that produce commodities. For example, buying stock in an oil company is a way to invest in oil.
Another option is to buy commodity ETFs or mutual funds. These funds invest in a mix of commodity-related assets, making it easier for regular investors to get involved.
Pros
Can help protect against inflation
Provides portfolio diversification
Potential for high returns during certain economic conditions
Tangible assets with real-world demand
Can benefit from global economic growth
Cons
Prices can be very volatile
Requires understanding complex global factors
No income generation (unlike stocks with dividends or bonds with interest)
Can be affected by weather, geopolitics, and other unpredictable events
Higher fees for some commodity investments
How to Invest in Commodities
For most individual investors, the easiest way to invest in commodities is through ETFs or mutual funds that focus on commodities. You can buy these through a regular brokerage account, just like you would buy stocks.
Some popular commodity ETFs track broad commodity indexes, while others focus on specific commodities like gold or oil. If you're interested in precious metals like gold or silver, you can also buy coins or bars directly. Some companies offer secure storage for these physical commodities.
Bottom Line
Take time to understand each investment type thoroughly before committing your money. There's no one-size-fits-all approach to investing. Think about your goals and how much risk you can handle. It's okay to start small and learn as you go. You can also diversify your portfolio across different types of investments to balance potential returns with risk.
Stay tuned for more information to make smart investment decisions.
