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You want to invest your money but don’t know where to begin; there are so many options out there! From stocks, to bonds, to mutual funds, your possibilities feel endless. I’ve outlined below the most common types of investments, laying out the pros and cons to help you understand your investment options and hopefully spark some thoughts about where you want to start. Before investing in one of these you may want to consult with a financial advisor to help guide you through the process.
Stocks are probably the most well-known type of investment and what most people will associate with “investing in the market”. As a retail investor, you’re able to purchase common stock in publicly traded companies, which means you are essentially purchasing a stake in the company. Your purchase price will depend on the share price at that time and may fluctuate throughout the day. In purchasing a stock, you hope that either the price goes up and increases the value of your total investment, and/or the company continuously dishes out dividends, allotting you a monthly or quarterly payment. While stocks allow you to essentially “get in on the action” and ride the tails of a company’s success, individual common stock also exposes you to more risk.
An ETF is a portfolio of assets (stocks, bonds, currencies) that tracks a market index (for example the S&P 500). ETFs are bought and sold on the market just like regular common stock. ETFs would be my recommendation for new investors; their diversified holdings make them a safer investment than buying individual stocks.
A mutual fund is an investment portfolio of stocks, bonds, or other assets. The mutual funds pools together money from different investors where each investor owns a share. Mutual funds are typically managed by a fund manager who picks the investments in the portfolio. Mutual funds are similar to ETFs in that they provide diversification of investment. However, there are three major differences.
1) Unlike ETFs, mutual funds often require a flat minimum price to start investing.
2) Instead of purchasing a share in a mutual fund at a real-time price, you pay a price that is calculated at the end of the day, meaning that everyone who purchased a share that day will pay the same price.
3) A mutual fund is actively managed by a portfolio manager in an attempt to beat the market. An ETF is passively managed and is based on a market index. A mutual fund is a great option if you can afford the minimum and prefer having someone actively manage your investments.
A CD is basically a savings account you can’t touch for a certain period of time. With a CD account you allow the bank to hold a certain amount of money for a predetermined period of time. In exchange, at the end of that time frame, you get back your principal plus interest. The longer you allow the bank to hold the money, the greater the interest you receive. CDs are FDIC insured up to $250,000 making it a very secure investment. However, because it’s low risk, the reward is also fairly low. The interest rates are low compared to other market investments (typically between 02%-0.8%). Additionally, because you’ve agreed to hold this money for a period of time, any early withdrawal can result in a penalty so make sure you don’t need this money now. Right now CIT Bank is offering competitive rates for CDs. (Paid Link)
Similar to CDs, a treasury bond is a safer investment but yields a lower return. A treasury bond is a government debt security. T-Bonds earn interest over time until they reach maturity at which point the owner is paid the face value of the bond. Because these are backed by the US government they are considered low risk but also low reward.
Cryptocurrencies are fairly new investments with the most popular, Bitcoin, popping up in 2009. Cryptocurrencies are digital currencies with transactions stored on a digital ledger. This investment is not FDIC insured making it very risky. Crypto has also been known to be very volatile. It is not recommended to make cryptocurrency a substantial portion of your investment portfolio because of its risky nature.
Below is a quick guide with the tax implications. Please note these are general guidelines and may vary depending on your situation so consult a licensed broker before making any trades. The risk assessment is based on my personal opinion and may be different for you based on your investment goals and portfolio.