Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.
Investments
To invest is to allocate money in the expectation
of some benefit in the future. In finance, the benefit from an
investment is called a return. The
return may consist of a gain or a loss realized from the sale of a property or
an investment, unrealized capital
appreciation (or depreciation), or investment income
such as dividends, interest, rental income etc., or
a combination of capital gain and income. The return may also include currency
gains or losses due to changes in the foreign currency exchange rates. For example,
an investor may
purchase a monetary asset now with the idea that the asset will provide income
in the future or will later be sold at a higher price for a profit. Investors generally expect
higher returns from riskier investments.
When a low-risk investment is made, the return is also generally low.
Similarly, high risk comes with high returns. Investors, particularly novices,
are often advised to adopt a particular investment
strategy and diversify their portfolio.
Diversification has the statistical effect of reducing
overall risk.
Various kinds of Investments
Think of the various types of investments as tools that can help you achieve your financial goals. Each broad investment type—from bank products to stocks and bonds—has its own general set of features, risk factors and ways in which they can be used by investors. Various kinds of investments are given below.
- Stocks
- Bonds
- Investment Funds
- Bank Products
- Options
- Annuities
- Retirement
- Saving for Education
- Alternative and Complex Products
- Initial Coin Offerings and Cryptocurrencies
- Commodity Futures
- Security Futures
- Insurance
Stocks
When you invest in a stock, you become one of the owners of a corporation. Stocks represent ownership shares, also known as equity shares. Whether you make or lose money on a stock depends on the success or failure of the company, which type of stock you own, and what’s going on in the stock market overall and other factors.
Stocks
and stock mutual funds often can be an important component of a diversified
investment portfolio.
Bonds
A
bond is a loan an investor makes to a corporation, government, federal agency
or other organization in exchange for interest payments over a specified term
plus repayment of principal at the bond’s maturity date. There are a wide variety of bonds including
Treasuries, agency bonds, corporate bonds, municipal bonds and more. Likewise
there are many types of bond mutual funds.
When
you invest in bonds and bond mutual funds, you face the risk that your
investment might lose money, especially if you bought an individual bond and
want or need to sell it before it matures. And bond mutual fund prices can
fluctuate, just as stock mutual funds do. Risk will also vary depending on the
type of bond you own.
Bonds
and bond mutual funds often can be an important component of a diversified
investment portfolio.
Investment
funds pool the money of many investors and invest according to a specific
strategy. Funds come in various types, each with differing features. Generally,
publicly offered funds—such as mutual funds, exchange-traded funds, closed-end
funds and unit investment trusts—must be registered with the Securities and
Exchange Commission (SEC) as investment companies. Private investment funds
(often called hedge funds) are often exempt from registration.
Funds
can offer diversification and professional management—and they can feature a
wide variety of investment strategies and styles. As with any security,
investing in a fund involves risk, including the possibility that you may lose
money. And how a fund performed in the past is not an indication of how it will
perform in the future.
Some
funds, such as hedge funds, do not register their shares with the SEC. This
means they are not subject to the same regulatory standards that apply to
mutual funds and other funds registered with the SEC.
Bank Products
Banks
and credit unions can provide a safe and convenient way to accumulate
savings—and some banks offer services that can help you manage your money.
Deposits
at banks and most credit unions are federally insured up to a limit set by
Congress. And transaction (or checking) accounts and deposit accounts offer
liquidity, making it easy for you to get to your funds for any reason—from
day-to-day expenses to a down payment or money for unexpected emergencies. In
addition to being insured by the FDIC, checking accounts let you transfer money
by check or electronic payment to a person or organization that you designate
as payee.
But
remember, the interest you earn from bank products—including certificates of
deposit (CDs)—tends to be lower than potential returns from other investments.
Types of Accounts
Options
Options
are contracts that give the purchaser the right, but not the obligation, to buy
or sell a security, such as a stock or exchange-traded fund, at a fixed price
within a specific period of time.
Options
can help investors manage risk. But buying and selling options also involves
risk, and it is possible to lose money. It pays to learn about different types
of options, trading strategies and the risks involved.
Annuities
An
annuity is a contract between you and an insurance company in which the company
promises to make periodic payments to you, starting immediately or at some
future time. You buy an annuity either with a single payment or a series of
payments called premiums.
Some
annuity contracts provide a way to save for retirement. Others can turn your
savings into a stream of retirement income. Still others do both. If you use an
annuity as a savings vehicle and the insurance company delays your pay-out to
the future, you have a deferred annuity. If you use the annuity to create a
source of retirement income and your payments start right away, you have an
immediate annuity.
The
two most common types of annuities are fixed and variable. There is also a
hybrid called an indexed annuity, also referred to as an equity-indexed annuity
or a fixed-index annuity. Variable annuities are securities and under FINRA's
jurisdiction.
Annuities
are often products investors consider when they plan for retirement—so it pays
to understand them. They also are often marketed as tax-deferred savings
products. Annuities come with a variety of fees and expenses, such as surrender
charges, mortality and expense risk charges and administrative fees. Annuities
also can have high commissions, reaching seven percent or more.
Types of
Annuities
Initial Coin Offerings and Cryptocurrencies
Digital
assets like cryptocurrencies and ICOs continue to evolve and spark interest
from Main Street investors. With billions of dollars raised in ICO financings
and over a thousand different cryptocurrencies currently available, these
rapidly changing markets are tempting for investors. It is also difficult for
most individual investors to make sense of these complex investment products
and to determine the risk levels associated with them.
Commodity Futures
Commodity
futures contracts are agreements to buy or sell a specific quantity of a
commodity at a specified price on a particular date in the future. Commodities
include metals, oil, grains and animal products, as well as financial
instruments and currencies. With limited exceptions, trading in futures
contracts must be executed on the floor of a commodity exchange.
The
Commodity Futures Trading Commission (CFTC) is the federal government agency
that regulates the commodity futures, commodity options, and swaps trading
markets. Anyone who trades futures with the public or gives advice about
futures trading must be registered with the National Futures Association (NFA),
the independent regulator for anyone who trades futures with the public.
Before
you invest in commodity futures, check to make sure the individual and firm are
registered and whether they are the subject of any disciplinary actions.
Insurance
Life
insurance products are often a part of an overall financial plan. They come in
various forms, including term life, whole life and universal life policies.
There also are variations on these—variable life insurance and variable
universal life insurance—which are considered securities and must be registered
with the Securities and Exchange Commission (SEC). FINRA has jurisdiction over
the investment professionals and firms that sell variable life and variable
universal life products.
Insurance
products often are developed to meet specific objectives. For example,
long-term care insurance is designed to help manage health care expenses as you
age. As with other financial products, insurance products can be complex
and come with fees, so it pays to do your homework before you buy.
Here
are some of the most common types of life insurance:
- Term Life Insurance. Term life
provides coverage for a specified and limited period, known as the term.
Premiums for most term policies tend to go up as you age or at the end of
each renewal period. After the term ends, so does the policy and its
coverage if it's not renewed.
- Whole Life Insurance. Whole life
or ordinary life insurance is a type of permanent life insurance. It
provides coverage for the life of the insured and can build cash value,
which is a savings feature. Premium payments typically remain the same for
the life of the insured.
- Universal Life Insurance. Universal
life provides coverage for the life of the insured and also offers
flexible premium payments and insurance coverage. The cost of your
insurance protection and in some cases other costs are deducted from the
cash or policy account value.
- Variable Life Insurance. Variable
life is a type of security that offers fixed premiums and a minimum death benefit.
Unlike whole life insurance, its cash value is invested in a portfolio of
securities. As the policyholder, you can choose the mix of investments
from those the policy offers. However, the policy's investment return is
not guaranteed and the cash value will fluctuate.
- Variable Universal Life
Insurance. This
type of security combines features of universal life insurance and
variable life insurance. It offers flexibility in premium payments and
insurance coverage, as well as an investment account.
Notes :-
1.
^ https://www.finra.org/
- Retrieved 12
December 2020
