11 Types of Common Investment Vehicles
As you may recall from our previous blog, 10 Tips to Achieving Financial Freedom: Part 2, investing is the process of setting aside money now with the expectation that that money will work for you and produce more money that you will redeem in the future. It’s important to invest to help mitigate the risk of inflation on your future finances so that upon retiring you can afford the life you lived pre-retirement. There are several investment vehicles that can be driven to achieve this goal and the best part is you don’t have to drive just one. In fact, it’s highly recommended that you use a few of these vehicles to achieve your financial goals!
To help you pick the best vehicle(s) for you, we’ve summarized a great deal of them below. Now, keep in mind that these may not be all of the vehicle(s) out there, but it’s a great first start to get you on your way!
1. Certificates of Deposits (CDs)
First on our list is one of our lowest risk investments, certificates of deposits (CDs). CDs are investments that involve giving a bank, or credit union, a lump-sum of money for a predetermined period of time that you may not touch. In exchange for not touching the money, the financial institution you do this transaction with will provide interest at a rate agreed upon at the time of transaction. This interest rate is also higher than that of a high-yield savings account and will increase as the length of time agreed upon increases. When the predetermined period of time is over, you’ll get your principal back (a.k.a, the money you deposited) plus the interest premium.
CDs are great long-term investments if you have money that you don’t need right away and would like to earn an interest rate higher than a savings account could provide. However, the interest rates you earn in a CD may not beat the returns you could make on the stock market.
Check out NerdWallet if you’d like to get started opening a CD account with a competitive interest rate.
2. Stocks
Next up are stocks, one of the most well-known types of investments. Purchasing a stock is to purchase a share, or small piece, of a specific company that is being publicly traded on a stock market exchange. Companies sell these small pieces of their business every day to raise cash for their business. Investors are able to buy and sell their pieces of the company every day, causing the stock price to rise and fall, respectively. Some companies also reward their investors with dividends as an incentive to buy and continue to own a stock.
Buying a stock means that you believe the stock price will rise so that you may sell it at a later date to make a profit. Of course, the unfortunate side is that you may purchase a stock that falls in price, and you may risk losing money. Nonetheless, the stock market earned an average annual return of 10% over the past 100 years, causing it to be one of the most proven investment vehicles to date.
Think you’re ready to start investing in stocks? Check out Motley Fool’s to learn How to Invest in Stocks!
3. Bonds
Purchasing a bond is equivalent to loaning money to a company or government. Similar to a CD, the institution you loan your money to will pay you back on a predetermined date. During the length of the loan, you will also receive interest payments based on an agreed upon rate at the time of transaction.
Of course, there is a risk that the issuer of the loan could default; however, government bonds are backed by “full faith and credit” which eliminates the possibility of that risk occurring. For this reason, bonds are generally considered lower risk and produce a lower average annual return than that of stocks, usually 5-6%.
Check out this guide on how to buy bonds if you’re interested!
4. Mutual Funds
Picking stocks and bonds isn’t for everyone and maybe you feel it’s not for you. No, worries! Purchasing a mutual fund will give you access to a large number of investments that is being actively or passively managed by a fund manager. When the fund earns money, through stock dividends, bond interest, etc., it will distribute a portion of that money to all of the investors that purchased that particular mutual fund. Another way to make a profit from the mutual bond is to sell it! Just like the stock price, the value of a mutual fund will increase as the investments within it increase in value.
However, it’s important to recognize that because the fund is being managed by someone an annual fee will be associated with the purchase and maintenance of the fund.
Check out this article on how to invest in mutual funds if you think this is a great investment vehicle for you!
5. Index Funds
Index funds are a type of mutual fund that is passively managed and tracks an index, as opposed to buying and selling individual stocks and bonds. This means that index funds aim to earn the same average annual return of the index they are tracking. For example, a NASDAQ index fund will aim to earn the same average return of the NASDAQ. This causes index funds to be less risky than mutual funds and individual stock investing, often resulting in lower returns as well.
Because an index fund doesn’t have an active fund manager, index funds tend to have a lower annual fee than mutual funds.
Ready to invest in index funds? Read Motley Fool’s guide on how to invest in index funds to get started!
6. Exchange Traded Funds (ETFs)
ETFs are very similar to mutual funds and index funds. They allow investors to purchase many stocks or bonds at once. ETFs are traded like a stock on the exchange. Purchasing shares of an ETF is investing your money in the objective of the ETF. For example, if you buy an Electric Vehicle ETF, your money will be invested in companies that buy, sell, or make electric vehicles, or their parts.
Similar to stocks, mutual funds, and index funds, investors of ETFs are hoping that the fund will increase in value so that they may sell at a profit. The price of ETFs rise and fall throughout the day, giving investors more opportunities to buy and sell at a profit.
7. Retirement Plans
We won’t harper on this investment vehicle, since it is discussed in our previous blog, 10 Tips to Achieving Financial Freedom: Part 2. However, we’ll take the time to reiterate that Individual Retirement Accounts (IRAs) and employer sponsored retirement plans, such as 401(k)s and 403(b)s, are great investment vehicles to get you to your long-term financial goals.
IRAs allow you contribute up to $6,000 annually into a managed portfolio and give you the opportunity to retrieve your investment, with no penalty, after normal retirement age.
Employer sponsored retirement plans allow you to contribute a portion of your paycheck directly into a managed portfolio and give you the opportunity to retrieve your investment, with no penalty, after age 59 ½. Your paycheck contributions are often matched with contributions from your employer, as well.
8. Options
Options are a contract that give investors the opportunity to buy or sell a stock at a predetermined price on a predetermined date. Buying an option is simply buying the contract, not the stock itself (yet). After purchasing the option, you can either buy or sell the stock based on the contract terms before or on the predetermined date, sell the contract to another investor, or let the contract expire (i.e., do nothing).
Purchasers of options make money when the price of the underlying stock goes up, or down, in the direction they predicted. If the price goes in the opposite direction than planned, then you only lose the money you spent purchasing the option.
Keep in mind that options are truly very complex investment vehicles. We urge you to read this beginner guide on how options work before investing in them!
9. Real Estate
Investing in real estate can be very rewarding and satisfying. While it can often require a large sum of money to participate, it’s not always like that. In fact, you can even invest in real estate with just $10! We’ll lay out the 5 simple ways to invest in real estate below and show you how:
Rental Properties – This strategy involves owning a house, condo, or apartment, and renting it to tenants for long (traditional) or short (vacation rentals) periods of times. It requires substantial money to purchase and maintain the home. However, it can provide a steady stream of income and tax-deductible associated expenses. If you have the patience to manage tenants (or the funds to hire a property manager to do that for you), then investing in rental properties might be for you.
Real Estate Investment Groups (REIGs) – If you want to own real estate but aren’t sure if you have the patience for tenants, then REIGs might be for you. REIGs are like small mutual funds that invest in rental properties, such as apartment blocks or condos. Investing in REIGs is like owning one or multiple units of living space that the company operating the investment group manages. While this strategy provides income and appreciation, it also is subject to similar fees as mutual funds and also subject to vacancy risks.
House Flipping – This strategy involves buying homes, renovating if needed, and selling them in a short period of time. People who flip homes often have experience in real estate valuation, marketing, and renovation. However, the great thing about this strategy is that it can offer significant returns in a short period of time.
Real Estate Investment Trusts (REITs) – Perhaps, you want exposure to a real estate portfolio without having to participate in a traditional real estate portfolio, then REITs may be your gig! Investors can trade REITs on major exchanges, like they would any other stock. By doing so, the money that an investor spends buying a REIT is used by the trust to purchase and operate income properties. Similar to stocks, REITs tend to pay dividends and they also tend to be long-term leases.
Real Estate Investment Platforms – This strategy is for investors that want to get in on bigger commercial or residential real estate deals. It does require investment capital from investors and tends to restrict access from withdrawing money for a specified period. However, investing via this strategy is completed online and the platform connects investors who are looking to finance real estate projects with their respective developers. While there are several real estate investment platforms out there, we recommend Fundrise, which has a minimum initial investment of $10.
10. Cryptocurrencies
I’m sure we’ve all heard the term cryptocurrency by now. They are a fairly new investment vehicle that allow investors to buy and sell digital currencies on a cryptocurrency exchange, such as Coinbase. The goal behind the idea of cryptocurrencies is that there will one day be a universal digital currency that will be accepted worldwide. Therefore, removing the need to convert fiat money (USD, JD, YEN, etc.) when traveling, etc.
Some disadvantages to crypto investments are that they are not yet backed by the government, prices fluctuate wildly, it has been linked to a lot of criminal activity, etc. On the other hand, it’s a faster more convenient way to transfer money, retailers are beginning to allow us to purchase items with them, and they are a great way to diversify one’s portfolio.
Want to get started in crypto? Check out this quick guide before you do!
11. Non-Fungible Tokens (NFTs)
Probably one of the newest investment vehicles you may have heard of are NFTs. NFTs are cryptoassets, by which each non-fungible asset is unique and can be used as certificates of authenticity for digital assets, such as artwork, music and video clips, virtual real estate, etc. These cryptoassets are bought and sold on NFT marketplaces, such as Mintable, OpenSea, Rarible, NBA Top Shot, Valuables, etc.
What’s cool about NFTs is that anyone can create one! You just need a digital wallet, Ethereum, and a connection to an NFT marketplace. But how can you make money? Its simple. You can sell it or trade it! Think of selling it as selling a product on the Amazon Marketplace, but via the NFT Marketplace. Via this marketplace you can list a sale price and just wait for it to sell. Otherwise, you can trade it like stocks and profit from buying it for low and selling it for high.
The future of NFTs and cryptocurrencies are very unknown, so enter at your own risk. If you are like the countless other NFT investors and would like to strike while the iron is hot, we recommend reading this article on NFTs before you get started.
Disclaimer: The information in this blog is based on my opinion and experience, it should not be considered professional financial investment advice. The ideas and strategies should not be used without assessing your own personal and financial situation, or without consulting a financial professional.
