Types of Investments
Most people have heard of stocks and have at least a rudimentary knowledge of what they are all about. When you purchase stock (either common or preferred), you are buying shares that represent ownership in a publicly traded company. If you purchase common stock you have voting rights, but not necessarily a share in the dividends. With preferred stocks, you generally recieve a dividend payment, but you have no voting rights. Your ultimate goal is to purchase stock low and sell that same stock when it's price goes up. That is not always the case, often the price stagnates or actually goes down. Dealing in stocks can be done online or through a broker; either way they are subject to fees.
When you buy a bond, you’re essentially lending money to a business or even a govenment. Companies issue corporate bonds, whereas local governments issue municipal bonds and the U.S. Treasury issues treasury bonds. After the bond matures — that is, 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 it is for stocks. While bonds tend to be considered extremely low risk, it is an investment and as such, there is some risk involved--The company you buy a bond from could fold, or the government could default. Treasury bonds especially, however, are considered a very safe investment.
A mutual fund is a company that pools the money from multiple investors. The mutual fund invests that pooled money in a broad number of ventures-stocks, bonds & short-term debt. Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks companies and other instruments in which to put the fund's money. Fund managers try to beat the market by choosing investments that will increase in value. A passively managed fund simply tracks a major 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 of the two. 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.
Exchange-traded funds (ETFs) are similar to mutual funds in that they are a collection of investments that tracks a market index. Unlike mutual funds, which are 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.
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 amount of time. When that time 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 major risks to CDs. They are FDIC-insured up to $250,000, which would cover your money even if your bank were to collapse. That said, you have to make sure you won’t need the money during the term of the CD, as there are major penalties for early withdrawals.
There are a number of 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 biggest advantage for 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, when you will presumably be in a lower tax bracket. The risks for the investments are the same as if you were buying the investments outside of a retirement plan.
An option is a somewhat more complicated way to buy a stock. When you buy an option, you’re purchasing the ability to buy or sell an asset at a certain price at a given time. There are two types of options: call options, for buying assets, and put options, for selling options. 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.
Many people use annuities as part or all of their retirement savings plan. 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 spcified future date. You can however also walk away at the end of your contract with the entire contract value. If you invested 100K in an annuity for 10 years and at the end of that 10 year contract period, the contract value is worth 200K you can transfer the entire amount to your bank account without any fees or charges whatsoever. If you turn on or Annuitize the income from your annuity, you will receive payments until death or only for a predetermined period of time in the contract. While annuities are low or no risk, they aren't high-growth. They can keep up with the market over a period of time and many times outperform the market due to the zero floor. When the market goes into decline, annuities have guarantees not to drop into losses. Annuities are among the safest investments that can be purchased. Also, generally there are no fees once you purchase an annuity.
Cryptocurrencies are a fairly new investment option. Bitcoin is the most famous cryptocurrency, but there are countless others. Cryptocurrencies are digital currencies that don’t have any 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 very risky investment.
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 price of the product will go down quickly. For instance, political actions can greatly change the value of something like oil, while weather can impact the value of agricultural products.
GERRY'S RULES ON INVESTMENT TYPES
Rule No. 1: Never Lose Money
Rule No. 2: Never Forget Rule #1