How To Get The Most Out Of 10 Common Investments

Stocks are also known as shares or equities and are the most well-known form of investment. When you buy a stock, you are buying an ownership stake in a publicly traded company.

Investors make money by buying stocks and selling them after the price of the stock has risen. There are tax implications when you sell a stock at a profit in the form of capital gains taxes. How much these gains are taxed depends on how long the asset was held before selling. Assets held for a year or less are short-term capital gains, while assets held for longer than a year are long-term capital gains.

Bonds are debt instruments purchased from companies (corporate bonds) and local, state, and federal governments (municipal bonds, U.S. Treasury bonds, notes, and bills).

When you are shopping for bonds, you need to check out each bond’s price, time to maturity, and coupon rate. The coupon rate is the annual money you will receive, expressed as a percentage of the principal that you pay to buy the bond. Coupon rates for new bonds are around the market interest rate. Most bonds will pay out interest twice a year. The risk for bondholders is the interest rate can fluctuate, and with it the price of the bonds. Finally, while the U.S. government will likely not default, other issuers might.

You make money from bonds by receiving interest payments while the money is lent. When the bond matures, you get your principal back.

Funds

A mutual fund is a financial instrument that pools assets from investors to invest in securities such as stocks, bonds, money market vehicles, and other assets. Mutual funds are overseen by money managers, who allocate the fund’s assets and attempt to produce capital gains or income for investors. Mutual funds charge annual fees, expense ratios, or commissions.

Mutual funds give small investors access to portfolios of equities, bonds, and other securities.

These funds invest in many securities, and their performance is tracked as the change in the total market capitalization of the fund. Employer-sponsored retirement plans usually invest in mutual funds.

Funds

Investors make money from mutual funds when the value of the securities in the fund increases.

Exchange-traded funds, or ETFs, track indices like the Standard & Poor’s 500 or the Dow Jones Industrial Average. They also can follow smaller indices associated with a particular market sector. Unlike mutual index funds, exchange-traded funds can be traded like stocks.

Funds (ETFs)

ETFs are often recommended to new investors because they are more diversified than individual stocks. And by choosing an ETF that tracks a broad index, you can further reduce your risk. You can make money from an ETF by selling it as it rises in value.

of Deposit (CDs)

Certificates of deposits are safe banking instruments available at banks and credit unions that offer higher interest rates than regular savings accounts in exchange for locking up your money for a specific period. A CD has a set term, ranging from a month to up to 10 years.

of Deposit (CDs)

CDs are good long-term investments for saving money. And they are safe. CD accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. Even so, you have to make sure you won’t need the money during the term of the CD, as there are penalties for early withdrawals.

Plans

Retirement plans are not a discrete category for investment but are vehicles to purchase stocks, bonds, and funds. These include employer-sponsored plans such as 401(k) and 403(b) or an individual retirement plan (IRA), of either the traditional or Roth variety.

Plans

Retirement plans have tax advantages. They allow you to invest pre-tax dollars (such as with a traditional IRA) and not be taxed on the money until you start making withdrawals upon retirement. The risks for the investments within a retirement plan are the same as the risks outside of a retirement plan.

For the more sophisticated investor, options are an interesting investment product – referred to as a financial derivative. When you acquire an option, you are purchasing the right to buy or sell an asset at a certain price at a particular time. There are two types of options: call options to buy assets, and put options to sell them.

To make money off an option, an investor locks in the price of a security, say a stock, betting that it will increase or decrease in value – depending on whether it is a call or put option. For example, in a call option, one risk is that the stock could decline in value and since you wouldn’t exercise the call option, you would lose the money spent on the option contract. Depending on the option contract, however, the risks can be far greater, as these financial instruments can be very complex.

An annuity is a financial contract you can sign with an insurance company in which you pay a premium, either through a lump sum or periodic payments, in exchange for guaranteed payments to be made at a later date.

Annuities are considered a useful strategy to help you fund your retirement, especially if you are concerned you might outlive your savings. Annuities come in two categories: fixed and variable.

A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit. Many cryptocurrencies are decentralized networks based on blockchain technology – a database shared and synchronized, enforced by a computer network. Cryptocurrencies are not issued by any central authority, making them immune to government interference or manipulation, at least in theory.

The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that won’t succumb to one failure event. Some investors have used them as alternative investments to diversify their portfolios outside of stocks and bonds. As we’ve seen this past year, cryptocurrencies can have wild fluctuations and investing in them is not for the faint of heart.

A commodity is a basic good used in commerce. A commodity usually refers to a raw material used to make finished goods. Hard commodities (oil, gold, and silver) are those used in energy and metals products, and soft commodities (wheat and corn) are used in agricultural goods.

Investors and traders can buy and sell commodities directly in the spot, or cash, market or through derivatives such as futures and options. Having commodities in your portfolio can be a hedge against inflation.