Where to Invest Money: Savings, Bonds, Stocks, and More
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So you've finally decided to invest. By now you should have realized that investing is not any other activity you can engage in with haste. Your assets are at stake, and even your future. It's best to inspect carefully the type of investment, that is, the investment vehicle that will drive you to attaining your projected returns.
Savings
Considered the simplest form of investing, this type entails the same basic discipline of putting away money on a regular basis—the literal effort of saving—so that it won't be spent. Instead, what you save is placed in a savings account with a fixed annual return rate that can grow over time. Savings can be easily accessed and converted to cash especially in case of emergency (meaning it has high liquidity), but interest rates may be pegged at a low figure for the longest time, thereby making it more of a long-term investment type. Of course, it is the investment vehicle that is the simplest to understand and the easiest to maintain.
Bonds
Commonly referred to as securities that depend highly on debt, and consequently synonymous to the term debt itself, bonds are given out by governments and corporations to those who wish to lend their money temporarily in hopes of higher returns in the future. The higher the interest rates, the lower the bond prices. Bonds may be traded in markets before they can be redeemed, but if they are claimed during the redemption date itself, the bond returns remain as predicted. In the U.K., government-issued bonds are known as gilts.
Bonds are comparably safer (risk-free) than the other investment vehicles. However, this spells relatively lower potential return.
For more information, check out Invest in Bonds.
Stocks
Also known as equity, stocks let you own some part of a company from which you have purchased them. Stocks are also known as shares, since you get to share ownership as well as assets, profits, and other earnings of the company. The higher the number of shares or stock, the higher your ownership stake becomes. If you have too few stocks in your name, though, the concept of owning a company isn't all that easy to accomplish: each share equals one vote to elect the board of directors during annual meetings. Big-time shareholders holding large numbers of stocks are usually the people who get to easily influence the company. Nevertheless, everyone holding some stake in that company is entitled to receive dividends, or profits that are divided among stocks.
Stocks can be of two kinds: common stock and preferred stock. Common stocks provide the highest of all investment returns, but in the case of bankruptcy and liquidation, shareholders with common stocks cannot receive money before all creditors, bondholders and preferred shareholders are already paid. Preferred stocks do not have the same rights as common stockholders. Unlike common stock, where the dividends that are to be distributed are never ensured, preferred stocks have a fixed, guaranteed dividend always.
For more information, check out Invest in the Stock Market.
Real Estate, Properties
Investing in real estate is a pretty good choice because, simply speaking, the world isn't getting any bigger. Unlike other investment options, real estate is real, physical land you can own and cannot disappear like intangible money that resides in stocks or bonds. Of course, land properties also fluctuate in value as do stocks or bonds. You get to profit from the improvement in value of the land you own, often by developing it into something that can earn even more. You can build houses or commercial establishments on it and keep all the earnings by renting the places out. You can also engage in a change of buy-and-sell of properties. Renovations that you might be able to pull off at lower costs increase the value of houses and other buildings, letting you sell extra. An indirect method of investing in real estate is through real estate investment trusts (REITs).
For more information, check out Invest in Real Estate.
Mutual Funds
Mutual funds consist of different stocks and bonds and other securities. Each fund in this collective investment scheme contributes to the payment of a professional body to choose which securities to buy and sell to gain profit. Mutual funds can engage in all sorts of investment activities, depending on the body you choose to pay your funds to: sector funds, bond funds, exchange-traded funds, index funds, etc. A mutual fund is also known as an open-ended investment company.
Mutual funds are normally not allowed to invest in commodities and their derivatives, as well as in real estate. But REITs, or real estate investment trusts, which focus on real estates, properties, and mortgages, can be invested in by mutual funds. The main advantage of choosing mutual funds is typically leaving the hassle of managing securities to a professional. Since mutual funds usually invest in a wider range of vehicles, risk is also distributed among all of them, which buffers the blow in case one or more of them fail. However, if there is a drop in market values, mutual funds are not insured federally.
Derivatives
Options – privileges for its holders to buy or sell an asset at an agreed-upon price on or before a specified date/time.
Futures Contract – an obligation of the holder of the contract to buy or sell an asset at an agreed-upon price on or before a specified date/time.
Forward Contract – an obligation of the holder of the contract to buy or sell an asset at an agreed-upon price on a predetermined future date/time
Venture Capital
Like real estate, venture capital is considered an alternative method of investment. Venture capital means investment in new, small but fast-growing companies perceived to possess much potential, especially in gaining profits in the future. Since companies which angel investors finance may take a while to develop and actually earn large profits, venture capital is considered a long-term type of investment. It also takes a good eye to bet on what can become huge in the market by the time the business hits.
It is also good to find out how these vehicles and asset classes perform over time. For an idea, check out the chart located here.
Once you've gained enough wisdom about the ins and outs of investing, it’s often best to have a combination of investment vehicles in your name. These vehicles essentially make up your portfolio. Since each type of investment has its own set of pros and cons, you can make up for the shortcomings of a vehicle by maximizing the advantages of another vehicle.
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