Lesson 3: Types of Investments

Although you can choose from many types of

investments, most people stick to a few main ones:

Stocks

When you buy a stock, you become part-owner of a

company.

When the company does well, its stock price

generally goes up; when it falters, so do its shares.

You can buy or sell your stocks whenever you want.

Stocks can zigzag wildly in value, and stocks of

individual companies sometimes go completely bust.

But over the long haul, and as a group, stocks are a

good bet. Over time, stocks have returned about
10% annually on average.

Bonds
 When you buy a bond, you’re loaning money to a
company or government entity.

By selling you the bond, the issuer agrees to pay you

back with interest over a certain amount of time.

Since most companies and governments pay back

their debts, bonds are as a whole considered a safer
investment.

The downside is they don’t earn nearly as much

money as stocks, returning an average of 5%
annually.

Most people select a mix of stocks and bonds for their

portfolio, including more stocks if their risk tolerance is
high and more bonds if it is low.

Instead of picking stocks and bonds one-by-one for

their portfolio, many investors buy mutual fund or
exchange-traded fund (ETF) shares.

Mutual Funds
A mutual fund is a basket of securities, like a ready-
made portfolio.

Mutual funds can invest in almost anything, including

stocks, bonds, real estate, and commodities.

Index funds track a benchmark, such as the S&P

500, meaning they match the market’s returns.

Actively managed funds try to beat the market.

Unlike ETFs, with mutual funds, you can only buy or

sell shares once a day.

ETFs

ETFs are mutual funds, but their shares trade on

exchanges like a stock. That means you can buy
and sell shares throughout the day.

Most ETFs are index funds.

Alternatives

If you want to venture further afield into the world of

investment choices, you can also consider:

Real estate: You can invest directly in real estate by

purchasing a rental property or indirectly by putting
your money into real estate investment
trusts (REITs).
Commodities: Gold, oil, timber, and other
commodities can swing wildly in price, so these
investments are generally considered high risk.

Collectibles: From art to stamps, wine, coins, and

everyone’s favorite regret—Beanie Babies—
collectibles can make for fun hobbies but
unpredictable investments.

Hedge funds: These are generally high-risk, high-fee

investment funds that are only available to wealthy
investors.

Startups: Investing in startups can take many forms

—from loaning your friend $1,000 to backing
companies through a crowdinvesting platform. This
approach comes with the potential to lose it all (or
maybe make it really, really big).