#1 – STOCKS
Stocks are probably the most well-known investment type out there. Everyone knows about Wall Street, and has heard of the DOW and NASDAQ stock exchanges, but do you understand what a stock is and how they work? If not, we encourage you to keep reading!
First, what exactly is a stock? Simply put, stocks, otherwise knows as shares or equities, are a way for an investor to buy and own a percentage of a publicly traded company. They can be with a large blue-chip company like IBM, Apple and General Motors, or you can invest your dollars in small and mid-size organizations who’s name’s nobody has heard of. No matter the size of the company, everyone is hoping for the same outcome…to make a profit! With stocks, you make money when the companies stock prices go up. Let’s look at an example.
Let’s say you bought 100 shares of company XYZ, Inc at $25 a share. You would have invested a total of $2,500 (100x$25) in this stock. If the stock price goes up to $35 a share, your same $2,500 is now worth $3,500 (100x$35) for a profit of $1,000. On the flip side, if that same stock dips to $15 a share, you are now left with $1,500 and a loss of $1,000.
Stock prices can fluctuate greatly, not only from day-to-day but from hour-to-hour so investing in stocks can be stressful for some investors. There are lots of different factors that cause a stock price to fluctuate. Here are some of the most common.
- Demand goes up
- Interest rate changes
- Companies financial position
- Changes in the companies structure or organization
- Market speculators activity
- Political changes
Before you make the decision to invest in stocks, do as much research as you can and make sure you create both short-term and long-term goals for yourself.
#2 – BONDS
When you invest in a Bond, you are basically agreeing to lend money to an entity. Usually this will be either a business or a government based entity. Another way to look at it is like an I.O.U between the lender, (that’s you in this case), and the borrower (the business or the government).
There are three types of bonds, they are:
- Corporate Bonds – Issued by private, non-governmental businesses
- Municipal Bonds – Issued by local governments
- Treasury Bonds – Issued by the U.S. Treasury
Bonds tend to come with a much lower rate of return than stocks, but with that lower rate also generally comes less risk. They are fixed income investments with a set maturity date. While the money is being used, the lender will receive regular interest payments. After the bond matures, or reaches it’s agreed upon end date, you get your principal back.
#3 – MUTUAL FUNDS
Mutual Funds can be confusing and hard to understand but we are here to help! The easiest way to think about it is you have a pool of people that choose to invest their money in a group of companies rather than directly with one company like with a stock. These groups of companies or funds, are not just randomly thrown together. They are researched methodically and categorized based on the goal(s) of that particular fund. The fund could include just companies in a certain industry or ones that are similar in size and in the same growth phase.
Each fund has a manager. The managers job is to try and meet or exceed the identified goals for that particular fund. When you are looking into Mutual Funds, make sure you do your research into the track record of the manager of the specific fund(s) you are considering. Past success is of course not a guarantee, but a consistent positive history is always a good place to start!
There are a variety of Mutual Fund types available. Some of the most common include:
- Equity Funds
- Fixed-Income Funds
- Index Funds
- Balanced Funds
- Money Market Funds
- Income Funds
- International/Global Funds
- Specialty Funds
Mutual funds carry some of the same risks as stocks and bonds but because they are diversified by the nature of how funds work, often times the risks can be minimized.
#4 – EXCHANGE TRADED FUNDS (ETF’s)
Exchange Traded Funds or ETF’s as they are also known, operate very similarly to mutual funds. They both include individual investors pooling their money together trying to leverage the diversity of a group of companies and investments. The main difference lies in how and where you invest your money. As stated earlier, with a Mutual Fund, you invest your money directly with a Fund Manager. With an ETF, you are actually investing directly in the stock market.
Another difference between ETF’s and Mutual Funds is the prices for ETF’s fluctuate all throughout the day as the market changes, instead of at the end of the day when the mutual fund records it’s net asset value. Exchange traded funds can also include all kinds of investments like stocks, bonds and commodities. Like Mutual Funds, they can be created and managed to support a variety of different investment strategies.
#5 – RETIREMENT PLANS
Although retirement plans aren’t really a separate investment type, we feel there are enough differences to warrant it’s own section. Retirement plans are made up of stocks, mutual funds and bonds so from that standpoint, they don’t offer any unique investment type options. What is unique about retirement plans however, is around taxation. Because retirement plans were designed to help you in the future, when you retire, they offer some unique and beneficial tax savings opportunities.
First lets cover the main retirement investment types and then we will dig a little into each one.
- Roth IRA
- Traditional IRA
- Employee sponsored 401k plan
- Employee sponsored 403b plan
Let’s start with a Roth IRA. With a Roth, you contribute after tax dollars. That means if you work for a company and they pay you every two weeks, you can use any net or after tax funds that you get from your paycheck to purchase a Roth IRA. After you contribute to your Roth with those after tax dollars, your contributions and earnings grow tax-free, and there is no cap on those earnings. You can withdraw any earnings tax-free and penalty-free as long as you are 59 1/2 or older.
A traditional IRA has the same 59 1/2 year minimum age to avoid paying fees, but besides that, a Roth and traditional IRA are totally different. With a traditional IRA, you contribute pre-tax dollars out of your paycheck. This means the money gets taken out of your paycheck before any taxes are taken out. Your earnings grow tax-deferred, but when you go to withdraw your money, all withdrawals are taxed as income at your current income age.
Employee sponsored plans like the 401k and 403b have some differences in their structure and how they can be used but the biggest difference is around the type of company who is sponsoring the plan. A 401k is for all private, for-profit companies whereas a 403b is only for government and non-profit organizations.
Both plans are of course meant for retirement so they share the same 59 1/2 year minimum to avoid withdrawal fees. Similarly, they have tax-deferred benefits meaning all contributions grow tax free in your account and you can contribute pre-tax or post-tax dollars in either plan.
#6 – CERTIFICATE OF DEPOSITS (CD’s)
A CD or Certificate of Deposit is a fixed rate, low risk, low return investment option. Like a Bond, they have a set maturity date which if met, will maximize your earnings. If you pull your money out before the agreed upon maturity date, you can pay fines and fees that will eat heavily into any interest you’ve already earned. Primarily you purchase CD’s directly from banks or credit unions but there are also online options as well. Like we mentioned above, CDs are a low return investment option, but you can most likely find ones that will offer you a better rate than a standard savings account. Long-term CDs will usually pay a higher return than short-term so if you have some investment dollars that you are comfortable not touching for a while, than a CD might be a good fit for you.
#7 – ANNUITIES
Annuities are a very common part of most retirement plans. They are a unique option as they are technically an insurance policy but they also have options to make periodic payments. The variations available amongst annuities can make them confusing. Here are just a few examples.
- They can have fixed or variable rates of return
- They can last until you die or have a set end date
- Some are tied to the market while others are purely based on insurance tables
- Some you can keep adding payments as you go and others just include a one time payment option
See what we mean by confusing? No matter the option you choose however, the purpose for investing in an annuity is to provide a fixed revenue stream later in life. When you retire, you want to make sure you don’t outlive your savings and an annuity can be a great option to help with that.
#8 – OPTIONS
Besides maybe Cryptocurrencies (which is next on the list!), options might be the most widely misunderstood investment type out there. They are confusing, come with a very high risk/reward potential and generally are not recommended for beginner investors. Options are primarily used on stocks, and there are two types of options available. One is a “Call” option, and the other is a “Put” option. The Call option is used when you want to buy, and the Put is for when you want to sell. In the example below, we will focus on a call option which is the most common.
You are an investor and you have identified a stock that you think will go up in price. You want to buy this stock using a call option so you contact a broker and they tell you the premium or the “call” fee is $3 per share for up to 100 shares purchased. You decide you want to purchase the call for the 100 shares so the total amount owed upfront is $300 ($3 x100). The strike price, or the price that the stock has to get to before you can exercise your option is $100 per share. Lastly, the agreed upon date range for this call is a maximum of 30 days from the initial purchase.
It’s now 27 days later, and that stock is now trading at $110 per share. Your shares have exceeded the call price by $10 a share which is great! You decide you want to execute or move forward with call option on day 27. To figure out your profit, you take your call shares purchased (100) and multiply that by the amount per share that exceeded the strike price which in this case is $10, and you are left with a total of $1,000 (100x$10). Now minus the fee you originally paid to place the call ($300) and you are left with a profit of $700 minus any fees.
Sounds great right? If after 30 days, those same shares dipped down to $80 a share however, your call is now worth nothing and you can walk away without executing it, but you are still out the $300 option fee you paid at the beginning.
Using options as part of your overall investment strategy can be a great idea, but you have to be someone who studies the market heavily. Nothing is guaranteed, but with the right research and planning, Options can most definitely be a viable “option” (pun intended) for any investment portfolio.
#9 – CRYPTOCURRENCIES
Cryptocurrencies…even the name elicits questions! This mysterious investment option is by far the newest kid on the block. Everyone has heard of Bitcoin, but there are numerous others out there like Dogecoin, Ethereum and Litecoin just to name a few.
Cryptocurrencies are a digital or virtual currency which is secured by cryptography making it nearly impossible to counterfeit or hack. They are generally not controlled by any one governing body which makes them less likely to be persuaded or manipulated. You can buy them on cryptocurrency exchanges and some retailers are now allowing you to use these currencies for your every day purchases.
They leverage blockchain technology which acts like a virtual ledger that records all transactions. That ledger is tied to a huge network of individual computers that help validate each transaction. Cryptocurrencies have received a lot of negative criticism because of their use in illegal activities and their infrastructure issues but there is some positives as well. Transferring money between two parties is extremely quick and easy and they have inherent inflation resistance due to it’s decentralized structure.
Congratulations for making it all the way down to #10! Maybe you just came to learn about commodities and you skipped #1-9, either way, let’s talk about some orange juice! Ok, we aren’t really going to talk about orange juice, but commodities are all about physical products like pork bellies, oil and yes, you guessed it, oranges!
- Agricultural – Wheat, Corn, Fruit
- Metals – Gold, Silver, Copper
- Livestock – Pork Bellies, Cattle
- Energy – Crude Oil, Petroleum, Natural Gas