Types of Investments: Slicing Through The Mystique

Types of Investments: Slicing Through the MystiqueInvesting. It is a term that scares the hell out of a lot of people. Even for those of us in the personal finance blogosphere, the mere mention of the word investing can send shivers down our spine. Investing is something that we all know that we should do. After all, why would we want to stick our money under a mattress when we can use that money to make money for ourselves? Still, we run for the hills whenever somebody asks us to expound on the value of investing our money.

 

The truth is that many people are confused because of what they think “investing” means. They get frozen by the idea of risking their money in something that they don’t understand. Yet, there are many different types of investments out there – from buying CD’s to making a Forex trade. Go ahead! Shake your money maker by trying some of these investment options.

 

Types of Investments

1) Stocks – This is what most people think about when they hear the term investing. There are many people who still don’t understand the stock market, how it works, or how they can make money by investing in it. They usually think that investing in stocks can only mean buying stock in individual companies. While many investors do choose this route, for common people like you and I, buying individual stocks may not be the best option.

 

Knowing boatloads of information about thousands of companies requires a lot of work. That is why many people opt to invest in the stock market through purchasing mutual funds. Mutual funds are essentially a group of stocks packaged together under one “umbrella” product. They holdings of the fund are managed by professional investors. Mutual funds allow the you to invest in many companies at once while the fund’s manager will buy and sell stocks from the fund as they see fit – eliminating much of the hard research for you.

 

Still another way for the common investor to invest in the stock market is to purchase Exchange Traded Funds (ETF’s). By investing in ETF’s, you are essentially betting that the market as a whole will go up or down. For instance, if you buy the SPDR Dow Jones Industrial Average ETF, you are (usually) betting that the Dow Jones Industrial Average will rise – in which case your ETF shares will increase in value, making you money. Out of the different types of investments that you can make in the stock market, ETF’s are generally the least intimidating way for newcomers – although there is obviously still risk.

 

2) Forex Trading – One of the coolest and most interesting types of investments can be found in Forex trading. Many people mistakenly think that they have never heard of Forex trading. Chances are, however, that they have; they just don’t realize it. Essentially, Forex trading (or foreign exchange trading) is trading in foreign currencies. It can be a great way to make money for somebody who is looking to invest.

 

While the name and concept may seem intimidating, the mechanics are really quite simple . For instance, if you think that the value of the Euro is going to increase over the value of the U.S. Dollar, you may wish to invest your dollars into Euros. If you are right, YAHTZEE! You have just made money that can be converted back into dollars. Otherwise, keep your money in foreign currencies and continue investing.

 

As with all types of investments, the potential is there to lose money if the exchange rates do not go your way. However, just like stock market investing, you can create stop-loss orders to limit your losses while opportunities for profits are unlimited.

 

3) Real Estate – This is one of those types of investments that many people forget exists. Buying real estate is something that many people understand, but don’t necessarily think of as an investment. Yet, not only can investing in your own home be a great long-term money maker, but investing in rental property is another great way to make money off of your money. Being a landlord myself, I love using real estate investing as a passive income stream. It certainly is not risk-free, but finding the right tenants can make it a low-hassle, high-reward venture.

 

4) Bank CD’s, Government Bonds, Etc. – If you are looking for extremely low-risk types of investments, you may want to consider certificates of deposits or government bonds. You can usually purchase these types of investments for small amounts of money. However, they typically do not provide very high rates of return. Furthermore, these types of investments create limited access to your money, so you may want to weigh whether or not those restrictions are worth the minimal returns.

 

As you can see, there are many types of investments available for all types and levels of investors. In my opinion, the key is to invest in things that you understand and find enjoyable. Knowledge is the key to overcoming intimidation. Learn as much as you can about each market before you invest. Try and diversify your investments within each investment category as well as between the differing types of investments. If you do, hopefully you’ll be able to sit on a big stash of cash at the end of the day!

 

What are your favorite types of investments? Do you prefer one type over another? Let us know in the comments below!

 

 

About Greg

Greg Johnson is a proud husband, father, and debt crusader who believes in living life now while saving for the future. He is the co-founder of the personal finance website Club Thrifty, where he brings the awesome sauce each and every day.

Comments

  1. Good write-up Greg! I tend to prefer to be in the stock market for the bulk of our investing. I do a mix of some individual stocks, index funds and a non-index etf. I would love to get into real estate to further diversify, but just do not have the time right now in order to adequately manage it.

  2. I don’t trade forex so I guess I am biased towards the other options you listed. Investing in stocks and real estate are my favorite. I particularly like the idea of cash flow from real estate, which is a big reason I bought the house I did (we have a renter in our basement studio). I hope to have more rental properties in the future.

  3. Great post for us, Greg, as we are just now researching this type of stuff. Thanks for all of the good info!

  4. I’ve been looking into tax liens lately as an investment vehicle. The rates way outpace the interest paid on any bank accounts or CD, plus they are just as safe. Essentially you are guaranteed to get your money back as the person will eventually get caught up on their real estate taxes or sell the home. In either case you will get your money barring some unforeseen issue like a total collapse of the housing market in a given area.

    • That is an area that I haven’t researched. We have thought about peer to peer lending, but this seems like an interesting niche as well.

  5. Good topic, and a great take!

    The best investment depends on who you are to a great degree. If you’re good with your hands and more of a people person, a rental property will work much better than stocks. If you’re a geek (like me) the thought of having to deal with tenants and handymen sends shivers down your spine (to quote your line) but spending hours on the computer digging through 10-K reports is but half a step from heaven.

    Success in investing depends to a great degree on the time spent on it: the more time you spend, the more successful you will end up being. And human nature says we make time for things we enjoy, and find reasons to procrastinate on things we aver.

    How’s that for along answer as to why I prefer stocks? :)

    • Ha! I love it! I absolutely agree. Invest in things that you enjoy and understand. The more we enjoy something, generally, the better our outcomes will be.

    • Great answer, William.

      Without a doubt those who follow their passions do the best. If you are doing something just to make money but without the serious interest to really get involved then you will probably run into trouble at some point.

      If it’s something you enjoy then it hardly seems like work to put the effort in and the time is well spent. From there success generally comes quite naturally.

  6. I haven’t gone into Forex yet, but maybe one day. I’m the type of person who likes to research like crazy before I buy something, so right now it’s just stocks.

  7. For the most part, I’ve just invested on broadly diversified index funds. I don’t know the future, so im not going to make indivual stock picks. I have recently stuck a toe in the water of peer to peer lending. All the reviews I’ve heard look positive, but well see.

  8. Greg, I love that you included forex in here! I worked in forex for years and still love to trade it. You don’t normally see it on the typical PF blog, so kudos to you!

    One thing to keep in mind for those who are interested in getting into forex. It is a pretty damn risky investment because it uses leverage, and the volatility in forex is far greater than you typically see in other markets. Make sure you know the risks before you get into it, but it sure is a lot of fun. If anyone has any questions you can hit me up on twitter at @earnverse.

    Happy trading!

    • I thought about mentioning that in the article, but I wanted to focus this more as a primer article than getting into specifics. Thanks for adding it to the conversation though!

    • Very true. As a forex trader myself for almost a decade I have seen WAY too many people blow up on insane levels of leverage.

      If you have a plan and put risk management as a top priority you’ll be fine as you no doubt know very well, Lacy.

      Good to see another forex trader around and thanks for putting the warning out there for forex market newcomers. People should definitely know what they’re getting into before even considering putting money on the line.

  9. I am a big believer in dividend growth investing. It’s nowhere near as onerous as stock picking for several reasons.

    1) The universe of dividend growth stocks is very small. Only a few hundred. And even less than that when you cut the companies that don’t have a very high yield.

    2) Investing in dividend growth stocks is a lot like investing in a business. You want to buy companies that produce cash flow (dividends) and have a history of raising them over time. Once you learn a few metrics, you’re on your way.

  10. Forex sounds exciting, but considering I barely know where most countries are, let alone anything about their currencies, I better leave that one alone. I think our best bet right now it so put money into tax deferred accounts for later and concentrate on building enough rental income to sustain us when and if we decide to leave the workforce. If we don’t, we’ll just sock that money into some other investment. I love choices!

  11. Very informative write-up and I learned something new with Forex. I also recently learned about peer to peer lending from Your PF Pro and thought that was interesting. Thanks for the information!

    • I am very interested in Peer to peer lending. Unfortunately, it is not legal to participate in my state. I can only buy notes on the secondary market in Lending Club.

  12. Stocks and mutual funds are still my best friends when it comes to investing. I like to stick with the classics.

  13. I mostly stick to individual stocks with my taxable and ROTH money. My 401(k) and roll over IRAs are in mutual funds because they don’t get any longer term capital gain treatment, so I invest them a little more generally.

  14. I’d also like to mention REIT’s and private money lending as other options in real estate besides owning actual property. The former requires less capital and risk exposure, while the latter tends to have the highest returns.

  15. Thanks for the breakdown, Greg. I’m hoping to start putting some of this knowledge to use in the next year or so. For now, working on killing debt first, then investing next :)

  16. I have so much to learn about investing! I max out the retirement accounts, but I need to get serious about other investment options, especially real estate.

  17. I invest in stocks now and want to get into real estate and maybe forex a little later after I have time to research it properly. We were thinking about renting out our current home, but the area and type of clientele that it will bring are not what I want to deal with. It wouldn’t be worth my time.

  18. I always liked real estate because you have more control over your investment. Real estate or income property requires more day to day management. I now invest in stocks which does not require the same attention on a day to day basis.

    • I have to say, real estate is my personal favorite as well. I understand it. I enjoy it. And, I love that it isn’t just a piece of paper. It is actual “real” property.

  19. Real Estate is something I really hope to be able to invest in sometime in the future! It`s a solid way of having a passive income!

    • We love it. We are invested on a fairly small level in real estate. If you own a large complex or more than just a few homes, it wouldn’t be quite as passive.

  20. Hey Greg,

    Another type of investment to consider since you have Stocks and Forex up there already is Futures. Have you looked into them as an option for what you need?

    Generally they are somewhere in between stocks and forex in terms of regulations and they give you a ton of trading options. The most popular is the Emini S&P 500 which is just a smaller version of the normal S&P contract. You can trade these contracts on short or long timeframes and there are loads of options out there to trade like Nasdaq 100, Russell 2000, Soybeans, and on and on…

    Futures tend to look a bit more intimidating to newcomers initially than the other options but once you learn a bit about it they really aren’t complicated to trade.

  21. I can’t wait until my debt is paid off so that money can be put to work. At the moment I’m figuring out a plan for distributing the money. The investment that I’m most interested in is real estate. I’d like to give income properties a try.

    • Income properties are great if you do it right. We can’t wait until our house is paid off either. At that time, we’ll decide on how we are going to invest that additional money.

  22. I have all of those investments except for Government bonds. I have looked into them, but their rate of return is too low compared to the others.

  23. We’re hoping to get into real estate on a small level (2-3 apartment rental) in the next year or two. As long as you pick the right location and have a market for renters (we’re thinking by a university or hospital) you can be pretty confident you’ll have consistent renters. We’re pretty excited about it all and hope to build slowly and buy more properties over time.

  24. I don’t do “favorite” because the second I choose a favorite, it’s the worst way to invest! I do like to stretch out and use investments many aren’t comfortable with, though: non-traded REITs, high yield bonds (not a great place right now….), and covered call writing are a few that are interesting.

  25. Good breakdown on the different types of investments. I have not started investing yet but I will start doing it once I finish paying off my debt next month. Forex trading sounds very interesting to me. However the peak time is usually at 3:30am Eastern time which might make it difficult since I have to be up at 6.

  26. Great post Greg! I like real estate, because I know it and can touch it. The stock market scares me, mainly b/c it is out of my control, and having to rely on other people who dont have my best interest at heart, gives me the heeby jebees.

    • I hear ya. That is exactly why I love real estate.

      I don’t ever like to invest in something I don’t understand…but I still do it. How is that for some bad advice? Ha!

  27. Wow. These are great. I always say that even if you don’t use them, you’re doing yourself a disservice by not knowing of and understanding all the investment vehicles that exist out there. Thanks guys!

  28. Great post Greg!

    A lot of people are attracted to Forex because of all the media and hype surrounding it and this may cause someone to start trading unprepared, which may not end well.

    A great way to start in Forex is to go through a broker which has good support and educational tools like training course and webinars. Of course practice accounts are also very important in order to test strategies and find a way that works for you.

    Looking forward to reading more from you!

  29. I like what you guys are up too. This kind of clever work and exposure!
    Keep up the wonderful works guys I’ve incorporated you guys
    to our blogroll.

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