Investment

Leaving lump sums of money in your bank account may sound like a good idea, but the reality is that inflation will erode their value over time. That’s where investments come into the picture. Despite some inherent risks, like market volatility, investing allows you to grow your money over time and avoid the drastic impact of inflation. In this brief explainer, we’ll take a closer look at the main types of investments and their pros and cons to clear up the main differences and help you navigate the sphere with relative ease.

Main Investment Types

Investing can be intimidating. Potential risks aside, the innumerable investing opportunities can be confusing, as you can’t figure out from the get-go which ones will be the most beneficial for your investing portfolio. To simplify the process, here’s a brief overview of the most common investments you’re likely to encounter:

• Stocks (Equities). Buying stocks — shares in the ownership of public or private companies — is among the most popular and straightforward investments. As always, there’s the rub: you or your financial advisor need to be able to identify the companies that are likely to profit. If the stock’s price increases, you can earn dividends or sell it for a higher price.
• Bonds. Investing in bonds — a loan to a government or a company at a certain interest rate — is another crucial element for portfolio diversification. The lender receives interest and gets the principal back after the bond matures.
• Mutual Funds. Another popular investing option is mutual funds, a pool of multiple investors’ money with a common objective overseen by a professional fund manager who can invest money in bonds, equities, etc.
• Exchange-Traded Funds. ETFs are akin to mutual funds; both are pooled investment funds that allow investors to diversify their portfolios. Unlike mutual funds, ETFs can be sold or bought at stock exchanges.
• Certificate of Deposit. Among the most low-risk investments, certificates of deposit are essentially savings accounts in banks and credit unions. The main requirement is that you agree to store your money in the account without withdrawing it for a predetermined period.
• Real Estate. Investing in real estate is among the most common investment options. Its pros are portfolio diversification and additional passive income. If you don’t want to deal with and manage purchased properties, consider buying shares in real estate investment trusts (REITs).
• Commodities. Other physical assets you can invest in are commodities, including metals (precious and industrial), livestock, energy (gas, oil, and petroleum products), and agriculture and soft commodities (coffee, sugar, cocoa, soybeans, wheat, corn, etc.).
• Collectibles. Purchasing rare and antique items, like comic books or stamps, is another option to diversify your portfolio. In addition to potential tax benefits, collectibles can increase in value over time. Of course, collectibles come with some risks, like potential counterfeits, physical preservation costs (as some items may require specific conditions to avoid decomposing), lack of liquidity, and fluctuating prices.

To wrap it up, despite numerous risks, investments remain the best way to generate income and avoid the detrimental effects of inflation. By investing in multiple assets, securities, and equities, like stocks, bonds, ETFs, mutual funds, collectibles, or real estate, you’ll diversify and grow your income while minimizing potential risks.