Types of Investments

There are plenty of ways to invest for your future. Understanding the specifics of different types of investments will help you make the right investment for your goals and situation.

Stocks are pieces of ownership within a company. Most often, you make money with stocks by selling them for a price higher than you paid. This is where the phrase “buy low, sell high” comes from. Ideally, you purchase stock from a company when the price is still relatively cheap. Then as the company grows, the value of your stock goes up. From there, you can sell the stock to other investors for more than you originally paid for a net profit. Of course, stocks can also go down in value, requiring you hold on to them or sell for less than you paid.

There are two main types of stocks: public and private.

Public stock

Public stock is stock from a public corporation and available for the general public to buy. There are two types:

• Common stock gives the buyer partial ownership of a company. This means the company and the buyer make and lose money equally. Purchasing common stock also gives the buyer voting rights on company matters such as corporate policy and leadership.
• Preferred stock gives the investor a certain percentage of the money a company makes each year. For example, an investor may buy a preferred stock for $40 with a 10% yield. At the end of each year, they’ll get $4 per share..

Preferred stocks are better for short-term investing because they fluctuate less, but common stock has more potential growth.

Private stocks

Private stocks are, well, private. This means the company limits stock access to a small group of employees or internal company investors.

Bonds are like loans. Most often, these are loans to businesses (corporate bonds) or government entities (municipal bonds, treasury bonds, etc.). While the entity uses the money lent to them, they make regular interest payments to the investor. A bond matures when the contracted agreement for the loan ends. At this point, the investor is repaid the loan money. Bonds tend to offer lower returns than stocks, but they are also lower risk. There is always the chance the entity defaults and stops making payments, but that’s unlikely, especially with treasury bonds.

Mutual Funds

A mutual fund is a pool of investor money spread between different companies and investment types. Mutual funds are managed by a professional who oversees the growth and strategy of the fund. Mutual funds often have a minimum investment (often in the thousands of dollars) and carry operating expenses and fees.

Exchange-Traded Funds (ETFs)

Like mutual funds, ETFs are professionally managed groups of investments (often called “baskets”). But ETFs don’t generally have minimums. You can buy into the ETF for as little as one share. You also have more flexibility and control over the price of the trade because ETFs are traded multiple times throughout the day and mutual funds are only traded once per day.