When someone mentions investing strategies or begins to talk about market updates, it’s easy to become confused. The world of investing is already huge and seems to get larger with each passing year.
With a few bits of information, virtually anyone can become a savvy investor. And once you understand some of the basics, you can build on that foundation and create a portfolio that will grow over time.
Investment Classifications
If you work with a personal financial advisor or an electronic site or app to create your portfolio, you may see different terms relating to the various types of investments available.
Investments are classified by the broadest bucket in which they seemingly fit. Here, we’ll summarize each bucket and then look more closely at the specific investments within.
As you learn more about the different types of investments, you can decide which ones are best suited to your personality and investment style.
So without further ado, let’s get started.
8 Investing Terms Every New Investor Should Know (Video)
Securities
Securities and investments are common terms that investors hear used interchangeably. Securities refer to any financial asset that can be traded in any public or private market.
The primary purpose for selling equities is to raise capital, and the main reason for buying equities is to make a profit. Although the definition of securities may seem vague, you will surely recognize the language when we look at the different types.
Equity Securities
An equity security offers the buyer a share or stake in something the seller owns or represents. The most common equity instrument is a share of company stock.
Debt Securities
A debt security represents a note or loan issued to raise capital. Buyers in the debt securities market are actually lending their money to the seller or bond issuer.
In other words, debt securities are money borrowed that must be repaid and with interest.
Hybrid Securities
Hybrid securities are less common and feature unique characteristics of both an equity and a debt security. Convertible bonds are an example of a hybrid security instrument.
They begin as a bond but carry the option to be converted into a different security type at a predetermined date in the future. Buyer and seller must agree to the stipulations at the time of the original issuance date.
Bank Products
Modern banks originated from savings and loan companies, which were often seen as little more than a way to protect personal assets. The protection came not from a federal deposit insurance program (that came later) but from big safes with hefty locks.
Today, full-service banking centers combine all the features of historical savings and loan companies. Also, most banks offer other conveniences and necessities for individual customers.
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Consumer and retail banking institutions provide instant access to funds on deposit and offer everything from credit cards to mortgage loans. Let’s look at some common banking products and services offered to investors.
Personal Checking and Savings
At first glance, a basic checking account or savings passbook might not strike you as an investment. However, upon closer inspection, you’ll see that banks utilize these readily accessible accounts for broader goals. It’s highly likely that your funds are being used to support at least one other bank project or initiative.
Your personal savings account earns interest and helps investors save for the future. Some checking accounts also earn interest if an average daily balance is maintained.
The act of investing is merely putting aside money in a specific place for growth or earning money. Considering a personal checking or savings account fulfills this purpose, they certainly fall into the investment category.
Money Market
A money market account is a bank product that works sort of like an interest-bearing checking account. Traditionally, you can access money market accounts without interest or penalties.
Funds invested in a money market account usually earn a higher interest rate than traditional checking or savings accounts. Specific banks may have their guidelines around money markets, such as variable interest rates and minimum balances.
Certificates of Deposit
Certificates of Deposit, or CDs, offer a fixed rate of return. The interest rate on a CD is generally higher than a money market or regular savings account because a CD has a set term.
Depending on the financial institution, CD rates, and terms will vary. Certificate accounts range, on average, from six months to five years.
If you choose to invest in a CD, many banks allow continuous deposits and no minimum investment amount. Plan to keep your money in the account until the certificate maturity date because early withdrawal penalties could apply.
Tangible and Intangible Investments
So far, we have looked at several common types of investment. Even if you don’t have first-hand knowledge, you have probably at least heard about most of the investments we just reviewed.
Next, we will cover some less common investment options. These may be less familiar to you, but it’s important to understand some various investments that could potentially work for your future portfolio.
Tangible investments provide the chance to acquire physical goods that can be cultivated, improved, and exchanged in public and private markets. On the other hand, intangible investments typically involve partaking in a service opportunity or buying into an idea or concept rather than a concrete item.
Private Capital
A private capital investment generally requires a larger initial investment than we have yet described. This may not be an ideal investment choice for beginners, but you could consider a private capital venture in the future.
Investors help start-up companies raise cash for all types of necessary operating expenses. Private investment capital covers equipment, building space, and even staffing needs.
Real Estate
Investing in real estate, another tangible investment option can reap big rewards if the timing is right. Most new, and even seasoned investors, overlook opportunities to invest in real property.
Real estate investments present themselves in a few different ways. You can invest in a physical building, commercial or residential, and collect monthly rental payments.
If the idea of organizing the property management needs seems like too much work for you, there are other avenues for real estate investments. You can invest in properties and let other people manage the headaches!
Real estate investment trusts, or REITs, are medium to large funds made up of several commercial property investments. These managed trusts offer investors a way to diversify their portfolios without learning the ins and outs of real estate.
One last real estate investment opportunity we will review is a relatively new concept. Goal-based real estate investments rely on multiple investors pooling their resources to invest in large-scale real estate development projects.
These require smaller minimum deposits and offer different options for receiving dividend- or interest payments throughout the term of the project. Since these are considered alternative investments, you should carefully consider the details before investing.
Exchange-Traded Funds
Exchange-Traded Funds, or EFTs, are growing in popularity among new investors. We put them in the intangible investments because their layers make them rather complex to unravel.
ETFs follow a market index and are actively traded throughout the day like many other public and privately traded company stocks. To accurately anticipate the movement of an ETF, you would need to follow several hundred company stocks simultaneously.
The unusual thing about ETFs is that they are packaged together in a fund of stocks, in a similar manner that mutual funds are made up of many different company stocks.
Have you spotted the main difference between ETFs and mutual funds? The price of ETFs fluctuates throughout the market day, but mutual funds are only valued once per market day, at market close.
Commodities
Many new investors are intrigued by commodities and choose to dabble in this investment option based on tangible products. Commodities trade on several major and regional markets.
The underlying products in commodities are generally based on agriculture, precious metals, and energy. Soybeans, wheat, barley, gold, silver, coal, and solar power are some of the most actively traded commodities.
Given the unique nature of commodities trading, new investors should take the time to research the market before making a commodities purchase. You should closely monitor this aspect of your investment portfolio.
While commodities definitely provide diversity, they are a somewhat volatile investment choice. The commodities market can be affected by weather events, political influence, and other unforeseen factors.
In other words, commodities can be a fun addition to your overall portfolio, but they should not be a significant piece of the pie. Commodities should certainly not be the only investment choice in your portfolio.
Types of Investors
Since we have discussed the various types of investments, assessing the different types of investors is also fair. As you read through these investment personalities, see if you can identify your tendencies and investment style.
Risk Averse
This investor has a very tentative attitude toward risk. This investor would lose sleep at night if their investments fluctuated throughout the day.
Risk-averse investors may:
- Have less than three years until retirement
- Be saving for a significant purchase they expect to make in a year or two
- Not having stable or growing income from employment
- Have experienced a significant financial loss in the past
Risk Tolerant
Moderately risk-tolerant investors are willing to accept the potential of a temporary loss due to normal dips in the market. Of course, they do not want to lose money but can invest in slightly higher-risk stocks in the hopes of higher potential returns.
Risk-tolerant investors may:
- Have more than three years until retirement
- Understand the importance of a diversified portfolio
- Have adequate and growing streams of income
- Experience with investing options
Risk Seeking
Risk-seeking investors may also be thrill-seekers in other areas of life. Perhaps they ride every roller coaster in the amusement park or regularly play the lottery.
Risk-seeking investors may:
- Have ten or more years until retirement
- Above-average savings and income levels
- Feel very comfortable with taking risks
- Be saving for future generations
Understanding some of the reasons people invest in specific ways will also help you find your investment style. There are no right or wrong investment options, but you must feel comfortable with the investments in your portfolio.
Your investment horizon plays a major part in the type of investments that should be included in your portfolio.
Short-term investments such as bank products and debt securities are suitable for investors who plan to withdraw funds within three years of their initial investment date. It’s important to choose lower-risk funds to minimize the chance of losing your principal investment.
Longer-term and higher-risk investments are more suitable for investors who do not plan to take withdrawals for the next several years.
Consider creating more than one investment portfolio if you have more than one savings goal. For example, if you are saving for a house and retirement, keep these accounts separate.
Dedicate regular contributions to both accounts and choose investments that correspond with the goal of each account. This is also a great experiment to help you understand the relationship between investment risk and reward.