Making investments can seem like a challenging process. There are many types of investment opportunities out there. How do you know where to start? Investing is putting money into something and watching it grow in value. Nearly all types of investments have some level of risk to them. Often, the more risk, the more the potential reward. It is up to you to determine what level of risk you are most comfortable with and the type of investments you want to make.
It's only possible to list out some types of investing you can do. Yet, the more you know about it and how it works, the more likely you will find a method that fits your unique needs.
What is Investing?
Investing is the process of putting money into something with the hope that it grows in value. Stocks and bonds are types of investments, for example. With stocks, you put money into a company you hope will increase in value, helping your stock to be worth more. Bonds are loans you give to an organization or government with the promise of repayment at a set amount of time for a higher dollar value.
There are three types of investment methods. Each one is a bit different in terms of how they work, but they all have one goal – to help increase the value of your initial deposit into the account.
Investing vs Savings
A savings account is a type of investment. You are putting money into a savings account, so the bank or credit union can invest that money into the financial markets to grow their profit. You earn interest on your money in the account, paid by the bank or credit union.
One key difference between investments and savings is how your money grows. With an investment, you are giving an organization money, and hopefully, they will find a way to increase that money in value. You are paid back as that occurs. With savings, you are paid an interest rate no matter what the bank's underlying investments do.
Savings is an excellent way to put money away and keep it accessible to you. Investments carry more risk, and in most cases, there is some risk that the investment will fail outright, which could put you at risk.
Types of Investments
Consider the types of investments commonly used today and how they work.
Ownership Investments
An ownership investment is one form of investing with a high-risk level, and it has the most risk for failure and the highest potential for profit if all goes well.
Stocks are one of the most common types of ownership investments. Here, you are buying a portion of the company. The company takes that money to use for its needs (that you pay), and if the company continues to do well, its value increases. That increases the value of the stock you own.
Real estate is another type of ownership investment. In this type of investment, you purchase a home or land to live in or even rent out. Most of the time, real estate appreciates in value, especially when considering the long term. If you improve the property in any way, that can also increase its value.
Businesses are another type of ownership investment. You could start a business, grow its value, and make it profitable. That would help you earn from the company, though this is one of the most challenging investments.
Lending Investments
Another investment strategy is a lending investment, in which you will lend money to an organization that agrees to pay that money back to you with added value. Most often, lending investments carry lower risk levels, and their returns tend to be modest.
Bonds are a common type of lending investment. They allow you to purchase a bond for the face amount, and you hold onto those funds until you cash them for their total value.
Savings accounts are a lending investment because, as noted, the money you put into your saving account is used by the financial institution to earn profit. You make money on the interest paid to you from the bank.
Cash Equivalents
Another type of investment method is called a cash equivalent, in which the value of the investment is the same as cash itself. These are types of assets that you can cash in and convert back to money quickly.
Money market funds are one of the most common options here. You can purchase them at any bank. You commit to leaving money in the account for a set amount of time, and the financial institution pays you a fee for doing so. That is generally more than the average interest rate on a savings account.
Getting Started in Investing
Choosing to invest is a big step. Often, the first thing you will want to do is determine how much risk you are willing to take on. How badly would that hurt you if you lost all the money you plan to invest? You may have a low-risk tolerance if it would mean financial ruin or significant impacts on your well-being. In this case, start with bonds and savings accounts as a simple way to earn more.
If you are hoping to earn faster and are willing to take on some risk, consider investing in stocks. You can also open a wide range of financial accounts through a brokerage that can help you choose investments based on the types of companies you want to invest in or the rate of return you're hoping to have. The key here is to get started. Find some way to invest, and you'll be working to grow your money faster.