When you invest your money, you’re making your money work for you. Even small amounts of invested money can earn you money due to the power of compounding. Investing can generate wealth, help you meet financial goals, and aid in securing a solid retirement.
Investing is a personal thing, there is no one set plan for everyone, and your strategy will depend on your own personal financial situation, how long you have to invest, as well as how much risk you are willing to take.
Let’s look at a few of the most common types of investments.
Stocks
Stock is a share in the ownership of a specific company; it represents a small piece of a company’s assets and earnings that you get to claim. Companies sell shares of stock to raise cash. When the value of a company goes up, it’s reflected in the value of their stock. Investors make money on stock when they sell it for higher than what they purchased it. Some stocks also pay dividends to investors, which are distributions of the company’s earnings. Stocks have the potential to earn high returns but can also come with a high risk because the company can lose money or even go out of business.
Bonds
A bond is a loan that you make to the government or a company. When you purchase a bond, you allow the issuer to use your money and pay you back with interest, which is typically paid to investors once or twice a year. The total principal is paid back at the bond’s maturity date. Bonds are usually considered to be low risk, but they usually offer lower returns. Government bonds, especially U.S. Treasury securities, are considered to be the safest investment option available. This is because they are backed by “full faith and credit” of the United States.
Mutual Funds
For a lot of people picking individual stocks can be overwhelming or undesirable. That’s where mutual funds come in. Mutual Funds allow investors to purchase bulk stocks in a single transaction. Mutual funds pool money from multiple investors which gives it more purchasing power. A professional manager uses the invested money to purchase stocks, bonds, and other assets for the fund. Mutual funds follow a predetermined strategy and focus on investments that fall in line with it. When the mutual fund earns money, it distributes a portion of that to the investors of the fund.
Index Funds
Index funds are special mutual funds or ETFs with a portfolio of stocks / bonds that track and mirror an index, like the S&P 500, and hold investments from that particular index. This cuts out needing an active manager and results in lower fees. Index funds have become more popular over the last decade.
Exchange-traded funds (ETFs)
ETFs are investment funds that trade on the stock exchange. They are similar to individual stocks but are designed to track the performance of a particular index, commodity, sector, or asset class. This allows for a diversified portfolio of assets and exposure to various markets and industries. Like mutual funds, ETFs are passive, which results in lower fees.
There are many other types of investments with varying degrees of risk. Finding the right type of investments for you may take time and research. When investing, remember to consider your financial goals, your personal risk tolerance and find companies or other investments that you understand. If you have questions, please don’t hesitate to contact our office. It’s always wise to seek professional advice before jumping into an investment.