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TAKEAWAY
– People invest in the hope of future gain.
– They can invest in stocks, bonds, ETFs, real estate, and more.
– Generally, the higher the potential return, the riskier the investment.
When you invest, you acquire an asset in the hope that it will yield some profit in the future. The idea is to “make your money work for you.
“Investing is like sending a climbing team up a mountain…
There are many paths up a mountain. Some are shorter and steeper, others are longer and well-travelled. In some cases, a path leads nowhere or even on a dangerous detour. Every path – and every investment – involves a certain amount of risk. But with planning and a calculated strategy, your summit attempt can be well worth it.
Choosing your investments is all about balancing risk and return. In general, the higher the potential return, the riskier the investment.
What are some of the risks associated with investing?
Just as a climber on your team can slip or fall, any investment involves some risk. Your assets may rise or fall in value, and there is a possibility that the underlying companies or institutions may fail or go bankrupt. As a rule, these are rather extreme circumstances.
However, remember that you can send all your climbers on the same route or split your team on different routes (i.e., diversify your investments).
What kinds of investment accounts can I choose from?
There are many types of investment accounts. Here are a few of the most common:
Individual Brokerage Account
With a brokerage account, retail investors can invest in stocks, bonds, exchange-traded funds (ETFs) and mutual funds. GSAU is a brokerage firm that offers commission-free investments.
Retirement
A retirement account can help a person prepare for when they’re old and gray. As the name implies, these accounts help accumulate savings and investments for retirement – and they usually come with some sort of tax benefit (e.g., depending on the type of account, investment earnings may be tax-deferred or, in some cases, even tax-free). Keep in mind, however, that there are often restrictions and/or penalties on withdrawals made before retirement age.
What kind of assets can I invest in?
When you’re ready to invest, it’s helpful to get an overview of the country. Here are some of the most popular types of investments.
Cash and Cash Equivalents
Wait a second! This isn’t about keeping your hard-earned money under your mattress. Instead, it’s about how you divide your short-term money between different accounts – for many people, this includes a checking account and a savings account (as well as the cold, hard cash in their wallets). In addition to this conventional division of short-term money, many people are also turning to higher-yielding accounts that allow them to earn a little more interest on their deposits. Some banks offer high-yield savings accounts with higher-than-average interest rates (hence “high-yield”). However, these interest rates can rise and fall due to their correlation with the prime rate.
You can also invest your money in a certificate of deposit (CD). This is a different type of savings account that offers a higher interest rate than a regular savings account. However, in exchange for the higher interest rates, CDs have strict rules about when you can withdraw the money (hint: usually at the end of the term or upon payment of a penalty for early withdrawal).
Stocks
A stock is a unit of ownership in a company and represents a portion of a company’s assets and revenues. For many people, investing in the stock market is the key to building wealth.
However, investing in stocks can be very volatile – your assets can rise or fall in value quickly. Many factors can affect a company’s stock price, from the company’s production and supply chain to major global economic events and general investor sentiment.
One way to mitigate volatility is to invest in funds that pool different assets, potentially helping to diversify. Some exchange-traded funds (ETFs) and mutual funds do this. ETFs often track an index, such as the S&P 500. Mutual funds are similar to ETFs, but can only trade once per day.
Bonds
A bond is like an IOU, issued by a corporation, government, or institution in exchange for cash. In exchange for making a loan to one of these entities, the purchaser of a bond receives a specified payment (also called a coupon) at a specified interval. Like shares, most bonds are tradable on the financial markets.
There are several types of bonds. The federal government issues government bonds, while individual cities or towns may issue municipal bonds. Corporations issue bonds known as corporate bonds.
Investors generally consider bonds to be less risky than stocks – that’s because companies usually have to meet their obligations to bondholders before shareholders. In addition, interest payments on bonds are generally considered more consistent than profits or capital gains, which may depend on a company’s performance. Moreover, large, stable institutions such as the U.S. government are generally considered very unlikely to default on their financial obligations.
Real estate
Purchasing real estate, such as a home, is often considered a relatively stable investment, especially given the housing shortage in the United States. Whether the market value of the property rises or falls, you can usually profit from living in the property (or perhaps renting it to someone else). If you can’t afford a down payment or mortgage, but still want to invest in real estate, you can invest in financial vehicles called real estate investment trusts (REITs). These are companies that own, operate and seek to profit from real estate. Owning a share in them is one way to participate in this business.
Commodities
Commodities are physical goods such as gold, oil, beef, and orange juice.
Commodity trading is generally considered the domain of advanced traders who have a good understanding of factors such as supply and demand for these commodities (as well as seasonal trends). Here is an example specific to the oil industry: an agreement between countries from OPEC could restrict oil production, which could drive up oil prices – these can be complicated markets with many underlying dynamics to consider.
Cryptocurrencies
Cryptocurrencies are digital assets used for investment or payment. They are usually not backed by a government or central bank, and their transactions are recorded in a blockchain.
Although cryptocurrencies are not legal tender and are not sanctioned by a government, they can often be traded like currencies in a foreign exchange market. A word of warning: since their introduction in 2009 and beyond, cryptocurrencies have proven to be highly volatile assets. Bitcoin, for example, has experienced sudden surges and declines in recent years.
Collectors’ items
There are also non-financial assets. These assets include memorabilia, collectibles, and works of art. Examples include sports jerseys, rare stamps, and Banksy artwork. Building these portfolios often takes a lot of time and requires a keen eye and a good knowledge of the relevant market. Without it, it is very difficult for the layman to tell whether a work of art or a collectible is more likely to increase in value.
How can a person get started with investing?
Investing is all about figuring out how much work you’re willing to do and how much risk you’re willing to take. As a general rule, younger investors can take on more risk because they’ve a longer time horizon to recoup losses.
Once you’ve determined your risk tolerance and investment goals, you can send some of your money up the mountain in one or more of the ways described above in hopes that it’ll reach the top.
Disclosures
Trading in stocks, ETFs and options is commission-free at GSAU Financial, LLC. Other fees may apply. Please review GSAU Financials’ fee schedule to learn more.
Diversification does not ensure profit or protect against loss in falling markets
Dividends may be cancelled or reduced without notice for a variety of reasons.
This is a general description of common investments available today and therefore cannot fully describe all risks and considerations, and some may not be suitable for novice or even experienced individual investors. You should carefully review and weigh all risks and costs before investing.