Deciding how to spend money is sometimes less subjective than it seems. Those who understand how money works (primarily) use it as a resource to procure more money rather than as a means satisfy their most basic wants and desires. But taking this investment route requires some element of risk, and it helps to understand that risk before moving forward. See what it means to take a leap a faith with the four main types of financial investments.
The Stock Market / Mutual Funds
Stocks allow investors to buy a part of a company so the investor can take a portion of the company’s profits without actually having to work there. An investor may either choose to invest in one enterprise, such as a new technology company, or they can spread out their risk with a mutual or hedge fund. Both of the latter types of investment will have lower rates of return than the stock market, but they’re also less likely to lose the investor’s proverbial shirt. If the new technology company goes bankrupt, then an investor will have lost all of their funds. But by diversifying a portfolio, one company’s loss can be neutralized by another company’s gain.
Real estate investment usually has some of the highest rates of return, but it can also be a labor-intensive enterprise. Being a landlord is not only time-consuming, it’s also rife with potential tenant problems. Time-strapped investors may instead look into real estate investment trusts. These trusts make it easier to contribute to a real estate project without taking on as much responsibility for the property. However, investors will also cede more control of that property and may have a difficult time getting the updates and information necessary to make long-term decisions.
For those who don’t have a retirement account from their employer, investing in an Individual Retirement Account (IRA) can make it easy to save more money over time. Some accounts allow tax-deductible contributions up to a certain amount (usually that limit changes per year). Others will give the holder the chance to use their contributions tax-free after they retire rather than before. An IRA may not have the same type of return as either stocks or real estate, but it does lower the amount of risk and responsibility necessary to make the right investment moves. This option is highly recommended to risk-adverse individuals without a lot of time on their hands.
A bond is technically a type of loan that an investor makes to an organization that is likely to pay them back. Usually, it’s the government or a federal agency, but it can be given to corporations as well. Once the bond reaches its maturity date, the holder will be repaid the principle amount. Investors also receive additional funds as interest according to the terms of the bond. Bonds typically are safe bets, but there is still some risk involved. For example, if the holder needs to sell the bond prior to its maturity date, they may lose money overall. There are a variety of bonds on the market today, so understanding the nuances will be pivotal to success.
Whatever strategy an investor chooses, they’ll need to understand the details of their choices before investing. There are numerous forces at work, and they may remain hidden until it’s too late. By acknowledging and planning for the worst, investors can make their choices with far more confidence and a better chance of success.