Which Type of Investment Should You Choose?Roemarie Ann Periabras
Which Type of Investment Should You Choose?
The Dow Jones Industrial Average (DJIA) is on the cusp of crossing 20,000 points. Let that sink in.
Right now, you see the stock market booming and you’re beginning to think that you would like to get it in on the action. Whether it is in the form of stocks, mutual funds, real estate, lending investments and other types of investment vehicles, you are starting to wonder where you can park your income, so your money can finally work for you as opposed to the opposite way, which is generally how it works these days.
It is true that fewer people are investing their money, particularly those pesky millennials – individuals born between 1980 and 2000. It does make sense why they’re deciding to hide their money under the mattress rather than depositing it in the bank or investing in certain mutual funds.
Millennials lived through the dot-com bubble, the real estate bubble and the present bond market bubble. Suffice to say, millennials have lived through numerous bubbles in their short lifetime. At the same time, they have also seen their older counterparts lose their entire net worth because of the crashes that have unfolded over the years. There’s a reason why they’re hesitant.
However, this aversion to risk is unjustified because if you look at the long-term patterns you are far more likely to gain money in blue-chip stocks or mutual funds than you are to lose your earnings over your lifetime.
All it takes is thorough research, due diligence, openness to risk and some money to get started.
Let’s face it: we need to invest more in order to combat our stagnant wage growth, the rising cost of living and other hurdles that the average household has to overcome on a daily basis. But with so many different investment choices out there, which one should you choose?
Let’s take a look at all of your investment choices, shall we?
There are three primary types of ownership investments: stocks, real estate and precious metals.
A stock is very simple to understand: it is a share in the ownership of a company. The stock accounts for a claim on the company’s assets and earnings. The more shares or positions you own in a stock, the greater your ownership in the company is.
There are numerous positives to owning a stock.
- By owning a stock, you can receive a monthly, quarterly or annual dividend from the company simply for owning stock (you can liken it to receiving interest on your savings account every three months or so).
- When you own a stock, your initial investment in the company will likely climb over time, even if you start investing towards the end of the boom.
- If you invest in a blue-chip stock – Facebook or Amazon, Suncor or Exxon – it will rise over time, even when there are times when it falls (you should never panic when the dip arrives.
If you refrain from doing your research, listening to the experts and perusing the latest news reports on a particular stock then you could risk losing money on an investment. When you’re a novice investor, it is important to start off being a conservative trader. The longer you invest in stocks, the more seasoned you will become, and you will learn many of the tricks of the trade.
Here is one piece of advice: buy and hold is the best strategy to have!
For millions of Americans, the term real estate investing may send a shiver down their spine.
With that being said, real estate investing is lucrative, and anyone can do it. You can be a big time real estate mogul, or you can be someone who invests only a $100 per month in a real estate investment.
There are all types of ways to invest in the real estate market. Here are a few of those methods:
- Real Estate Investment Trust (REIT): a REIT is a type of security that invests your money in real estate through mortgages and property. A REIT trades on major exchanges similar to a stock. The benefit to this is that you can invest in real estate without all of the high risks. You can also receive special tax considerations and even receive high dividend yields.
- Rental Properties: you simply buy a property and rent it out to tenants. This is a lot more difficult investment because it requires a greater amount of capital, more of your time and higher risk.
- Real Estate Investment Groups: when you want to own a rental property but don’t want to be a landlord then you can join a real estate investment group. This is when a company buys or builds a block of apartments or commercial properties and then permits investors to buy a unit as the group takes care of the maintenance. Think of it as a mutual fund for rental properties.
- House Flipping: these days, this term has a negative connotation, but if you know what you’re doing and have a pulse on the market then you can make a lot of money. You simply buy a property, renovate it and then sell it a few months later.
These are the most popular real estate investment vehicles for the average investor today.
Precious metals, which used to be a form of currency decades ago, is now an investment tool.
Precious metals include the likes of gold, silver, platinum, palladium and others. Since the year 2000, precious metals have been on a tear, surging 1,000 percent. It has also been a popular hedge against the uncertainty in the global economy and the financial markets for the last 10 years.
There are numerous ways to invest your money in this typically viewed safe haven asset:
- Physical Ownership: all you have to do is buy physical bullion: bars, coins and face value bags (official coinage that is 80 to 90 percent silver).
- ETFs: exchange-traded funds (ETFs) holds assets, such as stocks, commodities and bonds, and trades on the open market similar to a stock. This is the easiest way to gain exposure to gold in your investment portfolio.
- Mining Stocks: you can also invest in gold and silver by parking your money in mining stocks.
- Mutual Funds: an investment tool that trades in diversified holdings, like companies, cash and bonds, and is professionally managed by financial institutions.
A lot of investors choose to not actually own gold or silver bullion because they don’t want to keep such an investment in the home. It could be a security risk. Therefore many gold bugs will select stocks, ETFs and mutual funds.
When you do not have the appetite for risk and want to park your money in a near-guaranteed investment vehicle then the three most common types are bonds, certificates of deposits (CDs) and savings accounts. Nearly everyone has at least one of these kinds of lending investments.
Simply put: bonds are just loans, or IOUs, but you act as the bank. That sounds great, doesn’t it?
Indeed, a bond is a debt investment in which the investor loans money to an entity, which is generally a government or a corporation. The purpose of this is that a government or a business can offload its debt loads for a period of time in exchange for interest. They are usually guaranteed investments.
For example, a government may sell you a 10-year bond (10 years worth of debt), and if you hold on to that investment for the duration then you will be given a certain percentage of interest.
You can purchase a mutual fund that specializes in bonds, you can acquire actual bonds or you can partake in the junk bond market (a high-risk market that sells bonds from companies with low ratings).
Certificate of Deposits (CDs)
A certificate of deposit, or CD, is a savings certificate that is issued by a financial institution to a customer depositing money for a specified length of time. With a fixed maturity date, you are provided with a specified fixed interest in exchange for an agreed upon minimum investment requirement.
Here is how it would work: you deposit $1,000 into the bank for three years and you are given an interest rate of 1.3 percent. You can’t access these funds until the maturity date of the CD expires.
We all have a savings account, and it is the most popular investment method in the world today, even if the rates of return are pittance compared to what you can make on the stock market.
When you establish a savings account, all you have to do is deposit money and receive a small amount of interest every month. You can access your money anytime you wish, though your bank may apply fees if you decide to conduct transactions using your savings account.
There are four primary forms of cash equivalents that are, too, low-risk for investors. Here they are:
- Money Market Funds: these funds operate in the same way as a checking account that come with higher rates of interest. It allows clients and companies to better manage their money and the share price always stays the same at $1.
- Marketable Securities: these are financial assets that can be converted into cash quite quickly, which is otherwise known as being liquid. The maturity date is usually less than a year.
- Commercial Papers: these are utilized by corporations and large companies in order to receive funds as a way to respond to short-term debt obligations. The corporation pays the face amount upon expiration of the maturity date. Many experts liken it to a corporation’s payroll.
- Short-Term Government Bonds: these are offered by governments in order to fund state-run projects, and are issued in the nation’s currency. You only face three main risks: political, interest rate and inflation.
Investing your money does not have to be complicated. The more you trade and invest, the more fun it becomes, except if you lose large chunks of money, in which you then become fed up with it.
Every beginning investor will suffer through the ebbs and flows of the global financial market. As time goes by, you will be able to better understand financial trends, navigate through the haystack to find a grain (potentially profitable company), forecast certain directions of the market and know when to buy and sell stocks or units of mutual funds.
The best advice that anyone can give you is this: never, ever panic if a stock dips!
Source: Library (Andrew Moran, Professional Writer & Journalist)