Learning how to invest can be intimidating. You know that making smart investments is key to retiring well and building wealth but where do you begin? What are the essential pieces of information you need to make smart investment choices that make money and appreciate in value?
A good place to start is by knowing the top 10 common investments and how they work. Understanding this will make the rest of the process more enjoyable and will make choosing smart investments easier.
- Mutual Funds: Mutual funds are a very common investment. It is a collection of a group of investors money, invested into many different companies to diversify and increase the chances of that fund being profitable. How do you make money? Profits will be shared with investors through dividends and you can also make money when the value of your fund goes up.
- Exchange Traded Funds (ETF): ETF’s are also a common investment and very similar to mutual funds. The difference is that ETF’s are traded and sold on the stock market instead of through a fund company. How do you make money? All capital gains, interest and dividends from companies in that fund are paid out to investors.
- Stocks: When you buy stocks, you are buying a small percentage of that company. How do you make money? You can either sell the stock when it raises in value or be paid dividends (share of the profits) if the stock does well.
- Options: Options are similar to stocks but different in that you are essentially buying the option to buy or sell a stock at a future time and for a certain price. This is a more advanced form of investing. How do you make money? If you hit your “strike price” (the target price you chose) before the allotted time expires, you make a profit from that sale.
- Commodities: Everyone uses commodities (metals, agricultural products, energy, livestock), which can make them a smart investment. How do you make money? You buy a commodity with the hopes it increases in price, at which point you sell and keep the profit.
- Bonds: Another common investment, bonds are quite simple. You lend your money to an entity, whether it be a company or the government. How do you make money? That entity pays you interest payments on the principal and after a predetermined period, you get the principal back.
- Certificate of Deposit: This common investment is exactly like a bond, except that it is a deposit to a specific bank. They are insured, which makes it a smart investment, but the return can be low. How do you make money? You give the bank a set amount of money for a set amount of time. Once that time is up, you get the principal plus the interest back.
- Cryptocurrencies: Even if they aren’t well understood by most, cryptocurrencies are a common investment. A cryptocurrency is a form of digital currency that is not backed by any central bank or government. How do you make money? Cryptocurrency is quite volatile, which means that you have large swings in value. To make money, you hope to sell your cryptocurrency at a higher value than when you bought it.
- Annuities: Investments are meant to create a stream of income and that is exactly what annuities do. How do you make money? Annuities are an agreement between an insurance company and an individual. That individual pays that company a sum (either all at once or over time) and in return that insurance company will pay a stream of income to that person for a set period or until their death.
- Retirement Plans: Retirement plans are often considered a smart investment because they are a vehicle through which you can invest in other sorts of investments but with tax advantages geared towards retirement age. How do you make money? Retirement plans either allow you to invest pre-tax dollars (saving you on taxes now) or allow you to withdraw funds without paying taxes on them at a later date.
Smart Investments are Within Reach!
Your future is bright! Understanding the common investments and how to choose smart investments for you is a process but it is worth the time and effort you put in! Use this list as a baseline to get started on your investment journey. Happy investing!