What do you think of when you think of the word investing? Do you think of Wall Street and corporations? Do you picture the savings bond your grandma gave you for your eighth birthday? Maybe professional, suit-wearing business-people come to mind.
You’ve probably heard of some of the basic investments, such as stocks and bonds, but there are many more. Here are just a handful of different securities and assets you can invest your money in:
Stocks
Most people have probably heard of stocks, but in comparison, few probably own any.Stocks are a great investment for novices, experienced investors, wealthy, middle class, dirt poor, or basically anyone who is willing to invest the money.
When you own stock in a corporation, it means you own part of it.The amount of shares you own is how much you own of that company.The amount of stocks that a company has outstanding means the shares of stock issued that is still being held as investor.
To know how much of a company you own, you simply divide your shares by the shares outstanding. If you own 200 shares of 1,000,000 outstanding, you own .02% of the company. If you own 500 shares of 10,000 outstanding, you own 5% of the company. Unless you own more than 20% of a company, you won’t have a very important role or influence in the company aside from some voting rights. But technically you do own the company.
You buy shares of stock to make money. To make money with stocks, you must buy a stock at its price and later on when the price is higher, you sell it for what is called a capital gain. For example, you buy 100 Shares of stock A which is currently priced at $24. The total cost to you is $2,400. In 2 years, you sell all 100 shares at the price of $30 for a total of $3,000. Your capital gain is $600.
There are hundreds of companies you can invest in both in the U.S. and in foreign countries. Some common methods of investing in stocks include buy-and-hold, short-selling, and trading. Stocks can prove to be a very lucrative investment. Read The Neatest Little Guide to Stock Market Investing to learn more about stocks.
Bonds
Bonds are another very common investment.When you purchase a bond, you are lending money to the bank, corporation, or government, whoever you purchase the bond from.The bond has a maturity date which is the time the entity you lent it to will pay you back.
There is also an interest rate that they will pay you annually or semiannually, that is the money you earn. You can also earn money if you buy it for less than the face value (amount printed on the bond). For example, you could buy a $1,000 bond for $950 with with a 6% interest rate with a 10 year maturity, you will be paid $60 a year for ten years, and when the bond matures you will be paid $1,000. Your gain is the $50 paid back over $950 plus $600 ($60 times 10 years), for a total of $650.
Though bonds have a maturity date, you don’t have to hold it until maturity.You can also buy and sell bonds just like stocks.
Bonds should make up more and more of your portfolio as you get older because they are less risky. As you get older, you want to take less risks to ensure that you won’t lose the money you’ll need when you’re retired because you won’t have a regular salary income. The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More will help you understand bonds better.
Mutual Funds
A mutual fund is a large collection of stocks, bonds, or other securities. To invest in a mutual fund, you invest a minimum amount, usually $1,000 to $2,000. Your money is pooled together with the money of other investors. A mutual fund manager is in charge of your fund and uses the money to invest in different securities.
Mutual funds are beneficial to those who don’t have enough money yet to properly diversify their portfolio, want a professional to manage their portfolio, or want a cheaper way to invest. No-load mutual funds are very affordable because “no-load” means no fees. If you are interested in mutual funds, read Morningstar Guide to Mutual Funds: Five-Star Strategies for Success.
Derivatives
Derivatives are a little more complicated than stocks, bonds, and mutual funds. There are many different kinds of derivatives such as options, futures, SWAPS, Warrants, and others. Commodities are also a derivative. A commodity can be corn, steel, wheat, or something else of substance that people buy and sell usually through future contracts.
Because derivatives are detailed and more difficult to understand, I’m not going to go into detail here, but I encourage you to read up on them to see if they are a good investment for you. Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options is a great beginner’s guide to derivatives.
Real Estate
Real Estate investing is much different from investing in securities such as stocks, bonds, and derivatives, mostly because real estate is a tangible good and you often have to have a substantial amount of money to get started. If you own a house, you have already invested in real estate.
Some people flip houses, meaning they buy a house, fix it up, and then sell it for a profit. Others buy buildings and rent them out or buy foreclosures and sell them. If you want to get into real estate, I suggest reading up on it and choosing an option that will fit you best. A great place to start is with Real Estate Investing for Dummies.