Fundamentals Explained in Different Types of Investments
If youâre looking to start investing, understanding the basics is critical. Then you can confidently build and manage your portfolio over time.
Four basic investment types are stocks, bonds, mutual funds and exchange-traded products (ETPs). Each has opportunities for earning returns, as well as risk.
Investing in real estate is the ultimate investment goal for many investors. It is a safe, stable asset class rarely affected by market conditions.
There are various ways to invest in real estate, including buying and selling the property, even in distressed conditions like what Peter Hungerford usually invests in. It is also possible to purchase shares of a real estate company.
Residential is the most common type of investment and includes properties meant for families to live in, such as single-family homes, condos, and townhomes. Investing in residential properties can be lucrative, though it can be time-consuming and require much knowledge and patience.
Commercial is another broad umbrella that covers multifamily (5+ units) apartment buildings, offices, retail stores, and industrial properties. This area requires more profound business valuation experience and niche knowledge than investing in land or residential.
Stocks (also known as shares) are one of the most common investment types and an essential part of any well-rounded portfolio. They can generate higher returns than bonds and real estate but come with a high level of risk.
They can also be volatile, so investors should diversify their portfolios across various industries and geographies. Investors who are looking for capital appreciation should focus on growth stocks. At the same time, those with a more conservative approach may devote a portion of their portfolio to value stocks that grow at a slower rate but trade at a lower price.
There are also stock categories that make judgments based on perceived quality. These are typically the best investments for investors with a lower tolerance for risk.
Bonds are a valuable way for investors to diversify and minimize portfolio risk. They can also help reduce volatility, especially in a highly volatile stock market like the one weâve seen this year.
Governments and companies issue them to raise funds for various projects, which they then pay back as interest. The issuers can invest their money in asset classes, including stocks and real estate.
Different types of bonds are appropriate for specific investors depending on their investment goals, tax exposure, risk tolerance, and time horizon. These include government, municipal, corporate, and junk bonds.
Commodities are the raw ingredients that fuel our economy. They include energy products, metals, and agricultural goods like corn, wheat, cotton, soybeans, sugar and coffee beans.
Commodity investing can be an effective way to diversify your investment portfolio. However, commodities are often very volatile.
Investing in futures contracts (commodity derivatives) is the most common form of commodity trading. These contracts give you the right to buy or sell a certain amount of a commodity at a specific price in the future.
Traders can also invest in exchange-traded funds (ETFs) that track various commodity-related assets. ETFs provide diversification and are easier to trade than futures. They are less likely to be traded on margin and typically have low expense ratios.
Money markets connect businesses and government entities who need short-term loans with savers who want to earn interest while preserving capital. They are also crucial to the modern financial system, influencing the economy by setting interest rates.
Investments in money markets are typically very safe and an excellent place to park your excess cash. However, you should carefully review the money market accountâs minimum deposit requirement and fees.
There are two types of money market accounts – MMDAs (deposit accounts) and MMMFs (mutual funds). MMDAs offer higher interest than traditional savings accounts but require minimum balances and some fee restrictions.