Common types of investments to know about

It is so easy for a beginner to get lost in the world of investing. Stocks, bonds, mutual funds, ETS, and more — we will break down the most common types of assets so you can choose the perfect option for yourself.

What are the main investment categories?

Investments come in different shapes and sizes, but in general you can group them into three main categories.

1. Equity: an investor buys a share in a company.

2. Fixed-income: governments or corporations borrow money, and the lender gets regular interest payments and principal repayment.

3. Cash or cash equivalents: apart from cash itself, these are checking, savings or money market accounts.

Common types of securities

Mutual funds

A mutual fund is one of the most common types of investment vehicles. People put money into a mutual fund, investing in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are usually run by professional managers rather than the investors themselves. The managers decide which assets to buy or sell based on the fund's goals.

The main types of mutual funds are:

• equity funds — you can use these to invest in stocks.

• index funds — passively managed funds that mirror a particular market index (like the S&P 500, for example).

• bond funds — focus on income-generating bonds and are usually less risky than equity funds.

• money-market funds — involve investing in short-term assets.

Why choose a mutual fund?

• The main benefit of this type of securities is diversification: instead of putting all the money in one stock, mutual funds invest in a range of assets, which helps spread out risk.

• Another advantage is professional management. This feature especially attracts beginner investors. Experienced experts analyze the market and make investment decisions on behalf of the fund.

• You can buy or sell shares at the end of a trading day. This flexibility gives you easy access to your money if you need it.

Bonds

Choosing a security that offers balance between stability and low risk? A bond is just such a security. In a nutshell, a bond is a loan: an entity repays the interest and, in time, the bond’s original face value. Governments use bonds to fund infrastructure, and corporations borrow to expand their business. This fixed-income investment is reliable but gives generally lower potential returns.

There are a few key components you should know about. A principal is the original face value of the bond. Bonds pay interest at a fixed rate, also called the coupon rate. For example, a bond with a 5% coupon rate on a $1,000 face value will pay $50 in interest each year until its maturity date — the date when the issuer has to repay the principal.

There are several types of bonds:

• government — issued by governments (US Treasury bonds, for instance). They are generally low-risk.

• corporate — issued by companies and tend to offer higher returns than government bonds due to higher risk.

• municipal — issued by local governments or municipalities, often with tax benefits.

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Stocks

Stocks basically represent the concept of ownership — when you buy a stock, you buy a share of the business’s assets and earnings. Stocks are what often jumps to mind when one thinks of quick ways to to build wealth over time. It might be quick, but it certainly has its challenges — for instance, they come with more risk than fixed-income investments because of market fluctuations (which are inevitable).

Let’s look into two main types of stocks.

• A common stock — gives a shareholder the right to vote and receive the dividends if the company pays them.

• A preferred stock does not give any voting rights, but nonetheless the stockholders have a higher claim on assets.

Stocks offer capital gains (the profit earned when a stock increases in value and the shareholder sells it for a higher price) and dividends (a portion of a company’s profits in cash). Stock prices may fluctuate based on a range of factors, including company performance, investor demand, industry trends, and the overall economic environment. You can buy or sell stocks on exchanges, like the NYSE or the Nasdaq. Investors can trade stocks actively or passively.

Exchange-traded funds (ETFs)

One can compare an exchange-traded fund to a basket of assets: it can include different securities, such as bonds, stocks, or commodities. Just like mutual funds, ETFs are quite diversified. The difference is that unlike mutual funds, which you can trade only at the end of the trading day, ETFs can be traded on exchanges during the trading day like stocks.

ETFs can focus on stocks (tracking a particular index or sector), bonds, industries, or commodities.

Why ETFs?

The diversification of ETFs allows investors to gain broader exposure and lower the risks. They typically have lower fees than mutual funds and require no minimum investment, only the price of one share. They are also more liquid and offer greater flexibility compared to mutual funds.

On the flip side, because they track certain markets or sectors, ETFs are still exposed to market fluctuations. Some ETFs may deviate slightly from their underlying index due to fees, trading costs, or liquidity issues.

ETFs can serve various investment goals: investors use them for both long and short-term growth. Bond and dividend-focused ETFs generate regular income.

Retirement plans

Let’s look at the most common options for a retirement: employer-sponsored plans and individual retirement accounts (IRA).

Some companies set up employer-sponsored retirement plans for their employees, and often both the employer and the employee contribute to it.

• A 401(k) plan (in the US) allows you to put a part of your pre-tax income into a retirement account. Then you invest this money in different kinds of assets, such as stocks, bonds, and mutual funds.

• A 403(b) plan is similar to a 401(k), but is usually offered by nonprofits and public schools.

• A retiree can get a pension plan with a fixed monthly income. The amount of money depends on the previous income and time in employment.

Individual retirement accounts (IRAs) are savings accounts designed specifically for retirement. Employees contribute and invest in them independently, outside of employer-sponsored plans. There are:

• traditional IRAs, which allow you to invest your pre-tax income, lowering your annual taxable income, and grow your investments tax-deferred.

• Roth IRAs, in which the contributions are made with after-tax income, and there is no immediate tax deduction. Earnings also grow tax-free.

• SEP IRAs for self-employed workers.

Certificates of deposit (CDs)

Certificates of deposit (CDs) are known as pretty reliable and conservative investment tools. It’s as simple as depositing money for a certain period and earning a fixed interest. However, if you try to withdraw the money before the term ends, you will have to pay a penalty.

The pros of CDs are evident: there is a guaranteed income, the deposit is usually insured and the interest rates are high. On the flip side, they are much less liquid and there is always an inflation risk.

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Options

Options continue to gain popularity across the world, and no wonder. They are handy for various investing goals: managing risk, hedging, or generating income. Options are securities that give investors the right (but not the obligation) to buy or sell an asset at a predetermined price within a specified time period. Note that an investor does not directly own the assets themselves.

A stock, index, or commodity serves as the underlying asset for an option contract. The investor should buy or sell the asset by the fixed expiration date, or the contract becomes invalid. The option holder can exercise the option (buy or sell the asset) at a fixed strike price. The cost of purchasing the option is called the premium.

There are two main types of options:

• call option, which is about buying the underlying asset. Buying a call option is a good idea if you believe that the asset’s price will grow above the strike price before the contract expires. If that happens, you can buy the asset at a discount, then potentially sell it on the market for a profit.

• put option, which is about selling the underlying asset. Put options work like this: investors buy put options if they believe the asset’s price will drop below the strike price before the expiration. If it does, the holder can sell the asset at a higher strike price, then buy it back at the lower market price, gaining a profit.

Options are widely used for various investing goals: hedging, speculation, leverage, and generating income.

When dealing with options, consider the risks that come with them:

• they are valid only in the exact timeframe.

• leverage can multiply the gains, but it can also multiply the losses.

• options are sensitive to changes in the underlying asset’s price, and the market can be volatile.

Derivatives

Derivatives are contracts whose price depends on an underlying asset, index, or security. Investors often trade such contracts on exchanges, or over the counter (OTC). For example, forward and futures contracts are derivatives.

They are commonly used for leverage, as they allow investors to secure larger positions with a smaller amount of money. Remember that leverage amplifies both potential gains and risks.

Annuities

If you need a source of consistent income in the future, consider annuities. Insurance companies offer them as a way to convert a lump sum of money into regular payments that can last a set period or for the remainder of the annuitant's life. People use them mostly as a retirement source of income.

Here is a quick guide to annuities.

The initial investment or amount paid into the annuity, either as a lump sum or through a series of contributions over time is called a principal. Payout structure determines how and when the investor gets their annuity payments. They can be scheduled monthly, quarterly, annually, or even as a lump sum at a future date. When the investor makes contributions or deposits funds into the annuity, allowing it to grow, they are in the accumulation phase. When the annuity begins to make regular payments to the investor, they enter the distribution (or payout) phase.

Annuities come in various types:

• fixed, which pay a guaranteed interest rate over a specific period during the accumulation phase.

• variable, which offer a range of underlying investments in the fund, so the amount of payments vary depending on the investments’ performance.

• index, which provide returns based on the performance of a market index, like the S&P 500.

There are also immediate and deferred annuities. The former are purchased with a lump sum beforehand and pay out immediately, while the latter start payouts at a future date, allowing the principal to grow during the accumulation phase.

The obvious benefits of annuities make them an excellent choice for investors: they offer a reliable stream of income, providing financial security. Money invested in annuities grows tax-deferred, and many annuities offer additional features that allow for customization.

As for the risks, annuities can come with significant fees. They are typically long-term investments, and less liquid than other types like stocks or bonds. Fixed annuities provide consistent income, but can lose purchasing power over time if inflation rises. Some annuities offer inflation protection, but this can come at an additional cost.

Hybrid investments

Hybrid investments combine features of both debt (fixed income) and equity (stocks) to offer investors a middle ground between income stability and potential for growth.

The main types of hybrid investments include:

• convertible bonds.

• convertible preference shares.

• pay-in-kind toggle notes.

Hybrid investments offer diversification — there is a mix of asset types, which can reduce risks. Many hybrid investments offer both regular income (from dividends or interest) and potential for capital appreciation. Hybrid investments allow investors to choose products with different levels of stock and bond allocations considering their individual goals.

Although there are some factors you should consider.

• While hybrids are generally safer than pure stock investments, they often offer lower returns because of their fixed-income components.

• Hybrids are often sensitive to interest rate changes.

• Fixed-income components and dividend payments in hybrids tend to limit the upside potential that a pure equity investment might offer.

• Some hybrid investments can be complex and demand higher fees, which can impact returns over time.

• Market and credit risks can affect hybrids, especially those tied to corporate bonds.

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Commodities

Commodities refer to raw materials that can be bought, sold, or traded: resources such as metals, energy sources, and agricultural products.

Commodities are categorized into two main types:

1. hard: natural resources extracted from the earth, like metals and energy sources (gold, silver, crude oil, natural gas, copper).

2. soft: agricultural products and livestock (wheat, corn, coffee, sugar, soybeans, cattle).

Why invest in commodities?

• They often increase in value when inflation rises, which makes them a great hedging tool. For example, essential goods with high demand like oil, gold, and food prices tend to increase with inflation.

• Commodities are usually independent of traditional assets like stocks and bonds, which makes them effective for diversification.

• Commodity prices can be highly volatile, offering opportunities for great profits. Supply constraints, geopolitical tensions, and demand surges can cause price increases.

As always, however, volatility can play a negative role: the variety of factors affecting commodity prices can quickly and unexpectedly cause the prices to drop. For physical commodity investments, storage, insurance, and transportation can add costs, reducing profitability. Another disadvantage is that unlike stocks and bonds, most commodities do not generate income.

Comparative table by type of investment

How to purchase different investment types