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Investing 101

Stocks

Stocks may be the most well-known and straightforward type

of investment. When you buy stock, you buy an ownership share in a publicly traded company. Many of the biggest companies in the country — think General Motors, Apple, and Facebook — are publicly traded, meaning you can buy stock in them. When you buy a stock, you’re hoping the price will go up so you can sell it for a profit. The risk is that the stock price could go down, in which case you’d lose money. Brokers sell stocks to investors. You can opt for an online brokerage firm or work face-to-face with a broker. There are Fees and costs with Brokerage accounts.

Bonds

When you buy a bond, you’re essentially lending money to an entity. Generally, this is a business or a government entity. Companies issue corporate bonds, whereas local governments issue municipal bonds. The U.S. Treasury issues treasury bonds. After the bond matures — you’ve held it for a predetermined amount of time — you earn back the principal you spent on the bond, plus a determined rate of interest. The rate of return for bonds is typically much lower than for stocks, but bonds also tend to be at lower risk. There is some risk involved, of course. The company you buy bonds from could fold, or the government could default. Treasury bonds, however, are considered a very safe investment. Again, there are, at times, hefty fees associated with Bonds.

Mutual Funds

A mutual fund is a pool of money from many investors invested broadly in several companies. Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks companies and other instruments to put investors’ money. Fund managers try to beat the market by choosing investments that will increase in value. A passively managed fund tracks a primary stock market index like the Dow Jones Industrial Average or the S&P 500. Some mutual funds invest only in stocks, others only in bonds, and some in a mixture. Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in. The risk is lesser, though, because the investments are inherently diversified.

But again, there are fees with Mutual funds as well.

Exchange-Traded Funds

Exchange-traded funds (ETFs) are similar to mutual funds because they are a collection of investments that track a market index. Unlike mutual funds purchased through a fund company, ETFs are bought and sold on the stock markets. Their price fluctuates throughout the trading day, whereas mutual funds’ value is simply the net value of your investments. ETFs are often recommended to new investors because they’re more diversified than individual stocks. You can further minimize risk by choosing an ETF that tracks a broad index. Fees here as well.

Certificates of Deposit

A certificate of deposit (CD) is a very low-risk investment. You give a bank a certain amount of money for a predetermined time. When that period is over, you get your principal back, plus a predetermined amount of interest. The longer the loan period, the higher your interest rate. There are no significant risks to CDs. They are FDIC-insured up to $250,000, which would cover your money even if your bank collapsed. That said, you have to make sure you won’t need the money during the term of the CD, as there are significant penalties for early withdrawals.

Retirement Plans

There are many types of retirement plans. Workplace retirement plans, sponsored by your employer, include 401(k) plans and 403(b) plans. If you don’t have access to a retirement plan, you could get an individual retirement plan (IRA) of either the traditional or Roth variety. Retirement plans aren’t a separate category of investment, per se, but a vehicle for making investments, including purchasing stocks, bonds, and funds. The most significant advantage of retirement plans — other than Roth IRA plans — is that you put in pre-tax dollars. You won’t pay taxes on the money until you withdraw it in retirement, presumably in a lower tax bracket. The investment risks are the same as if you were buying the assets outside of a retirement plan.

There are also fees in these plans. A logical question to ask yourself. Do taxes ever go down? Or do taxes generally go up?

Options

An option is a somewhat more complicated way to buy a stock. When you buy an option, you can buy or sell an asset at a specific price at a given time. There are two options: call options for buying assets and put options for selling. The risk of an option is that the stock will decrease in value. If the stock decreases from its initial price, you lose your money. Options are a highly advanced investing technique, and you must get approval to participate in the options market. 

Annuities

Many people use annuities as part or all of their retirement savings plans. When you buy an annuity, you purchase a contract with an insurance company, and, in return, you get periodic payments if you turn on the income stream. The payments may begin right away or at a specified future date. You can also walk away with the entire contract value at the end. If you invest 100K in an annuity for ten years and at the end of that ten-year contract period, the contract value is worth 220K, you can transfer the entire amount to your bank account without any fees or charges. If you turn on or Annuitize the income from your annuity, you will receive payments until death or only for a predetermined period in the contract. While annuities are low or no risk, they aren’t high-growth. They can keep up with the market over some time and often outperform the market due to the zero floor. When the market declines, Annuities have guarantees not to drop into losses. Annuities are among the safest investments that can be purchased.

Generally, there are no ongoing fees once you purchase an Annuity. There are, however, options to buy insurance ryders to enhance growth or liquidity in some cases. I generally do not recommend them.

Cryptocurrencies

Cryptocurrencies are a reasonably new investment option. Bitcoin is the most famous cryptocurrency, but there are countless others. Cryptocurrencies are digital currencies that don’t have government backing. You can buy and sell them on cryptocurrency exchanges. Some retailers will even let you make purchases with them. Cryptos often have wild fluctuations, making them a risky investment. In the long term, though, I have recommended crypto as a backup play to a default in the currency as I have precious metals.  

Commodities

Commodities are physical products you can buy. They could be agricultural products like wheat, barley, and corn or energy products like oil, coal, or solar power. Precious metals like gold and silver are some of the most common commodities. Commodities investing runs the risk that the product price will drop quickly. For instance, political actions can significantly change the value of something like oil, while the weather can impact the value of agricultural products.