Financial coaches will always insist on savings and investment. Once you make the decision to invest, the next step is learning the types of investment to make. You have a wide variety of choices to choose from for diversification of your portfolio.
a) Shares (Stocks)
When you buy the stock of a company, you become part-owner and get a share depending on the number of stocks you buy. To buy these shares, the company must be traded publicly and listed on the Stock Exchange. The most popular Stock Exchanges in the country are the NYSE and NASDAQ.
A company is listed on the Stock Exchange after releasing an IPO (Initial Public Offer) where people buy its shares. The initial price is often lower and then starts rising depending on how the company performs. Still, chances for it going down are there and that’s part of the risk of investing in stocks.
It’s the norm for stocks to be traded on the Stock Exchange but some are sold privately as well. This is how some individuals start creating their personal portfolios but there are restrictions to this type of trading. You must adhere to set government regulations at all times. In case you want to buy stocks, it is advisable to consult a stockbroker from a reputable brokerage.
By selling a share of the company to the public, a company can raise funds required for certain purpose. You become a shareholder and can even get a portion of the total earnings the company makes. As a shareholder, you can vote on crucial matters affecting the company and get dividends. The amount of dividends you get is determined by how many shares you have.
b) Mutual Funds
When you invest in a mutual fund, you start trading in a host of different securities like stocks, money markets, bonds among others. This is the best way for beginners to access a detailed portfolio of various investment vehicles. Every mutual fund is under a money manager that sees to it that it performs at its best always. All investors involved in a mutual fund get an equal share of profit and losses incurred.
Before you invest in a mutual fund, keep in mind there is an annual fee called the expense ratio charged. Also, some brokerage firms charge commission depending on the mutual fund you have. Mutual funds work by collecting money from investors and using it to purchase more securities. Each mutual fund’s valuation depends on the securities the company chooses for its investors.
Every investor buys what is referred to as a unit of the mutual fund. How a mutual fund performs is crucial to how profitable it is. Once you invest in mutual funds you get a portion of many stocks. However, you don’t get any voting rights in the individual companies involved. A mutual fund is the best option when it comes to the concept of a diversified portfolio. The best part is that most mutual funds are low priced.
c) ETFs (Exchange-traded Funds)
ETFs are defined as a group of investment products used to keep track of an underlying asset. This asset can be in any industry without much restriction. ETFs should not be confused with mutual funds as they are listed on the Stock Exchange and are traded daily. They carry a whole host of investment securities and have a standard price used to trade. Their price is never constant and changes each trading day from morning to evening.
There are numerous assets involved in ETFs described as underlying assets and are preferred when it comes to a diversified portfolio. The choice of which ETF you want depends on whether you want to cut across various sectors or focus on just one. Any investor is allowed to buy as many types of ETFs as they want since there are several types available. These include Bond, Inverse, Industry, Currency, and Commodity ETFs.
You can’t walk up to the Stock Exchange and purchase ETFs at the counter. You must use a brokerage firm most of which are available online. Examples of ETFs you can come across are The SPDR Gold Shares, SPDR S&P 500, and SPDR Dow Jones among others. The importance of getting ETFs to diversify your portfolio is it’s expensive to purchase each stock separately. When you buy one ETF, you essentially buy shares in numerous companies with a single transaction.
d) Bonds
Bonds are issued by governments or private companies to investors. You lend the company or government a certain amount of money and get it back after the agreed time with interest. Basically, you lend them the money and they return it with the agreed interest. Bonds are how most institutions raise money for certain projects and must be honored as agreed.
Most government projects require a lot of money to execute and this is where bonds play a crucial role. They must raise funds to keep the projects going from start to finish. Similarly, private companies opt to issue bonds when they don’t want to use IPOs to raise the required funds. You can opt to wait for the bond to mature or sell it off to another investor. Bonds are common in many investors’ portfolios and make the most part of stable and risk-averse investment products. Still, they are not 100% free of risk.
At the time you purchase the bond you buy it at the issue price offered by the bond issuer. Most bonds are similar in terms of characteristics and all have what is referred to as the face value. This is the amount you will get once the bond matures. It encompasses the principal amount and the interest earned. There is a coupon rate that you must receive annually which is a certain percentage of the face value. Each coupon rate is paid on a set coupon date. Once the time for the bond elapses, it matures on its Maturity Date.
e) Options
An option is a contract undertaken by an investor with the option of either buying or selling an underlying asset. You can opt to trade in the asset or not as it’s not mandatory. This is what is referred to as having an option and has an expiration date that you must keep in mind. Consult a brokerage firm to purchase options.
Each option must involve two parties namely the buyer and the seller. To get rights that the contract issues the buyer, they must part with a premium as charged by the seller. The two types of options you will come across are pull and push options. Pull options are those that have 100 shares of the underlying asset. Trading in options is important and regular.
Most traders use options to speculate and have a leveraged position over an asset. This is done over a lowered price which is easier than purchasing the asset’s shares. In a market that is in a downward spin, the seller that has the put option might be required to purchase the underlying asset at a higher strike price.
f) Cryptocurrencies
Blockchain technologies such as cryptocurrencies have completely revolutionized the finance industry. Their popularity has driven prices up making many investors wealthy. Bitcoin is the most common cryptocurrency known to most people across the world. Learn about cryptocurrencies and add them to your investment portfolio.
First, understand that cryptocurrencies are a form of virtual currency. The reason most people invest in them is they are decentralized and not owned or controlled by any one entity. All transfers and exchanges are done online with little influence by national governments.
The blockchain technology is the most essential part of cryptocurrencies and is used to maintain a ledger online tracking all transactions carried out. This is a crucial part of this technology as it keeps real-time data showing the crucial information. It’s secure and shared far and wide. Blockchain technology has been embraced by many people across the world and has potential in numerous industries. For one, cryptocurrency has made it easier to transfer money without a third party. Still, this is not without problems as many criminal enterprises use cryptocurrencies for this same reason.
g) Commodities
A commodity is a tangible product that you can buy or sell. Many people who invest in commodities opt for precious metals, agricultural products, or energy. Precious metals include gold, silver, and platinum which are most common. For agricultural products, you have corn, wheat, and barley. Energy comprises of oil and natural gas.
Investing in certain commodities has a higher risk than most other forms. This is mainly due to the constant fluctuation in pricing experienced with these products. Some like gold and silver tend to have more stability. Others like oil are unstable and high risk. There is little distinction between commodities that are similar but from different parts of the world.
Nowadays commodities are more than just the normal wheat, oil, metals among others. The term has expanded to include currencies. Futures are used to trade commodities that are used to set the quality and quantity of the commodity. Producers and buyers make up the first part of a future contract. They are the ones to deliver the asset once the contract expires at a set point in time.
Next, comes the speculators who get to reap profits from the price movement of these commodities. Most are rarely stable and keep fluctuating. A rise in the price of a commodity is mainly driven by increasing inflation. The more in demand the commodity is the higher its price rises.
h) IRAs (individual Retirement Account)
There will come a time when you will retire. It’s important to plan for that time now while you still can. An IRA is an account that you set up for this purpose. It’s an investing tool that has some tax advantages attached to it. People create IRAs to plan for the inevitable retirement age where they’ll still need money to survive long after they can no longer work.
IRAs hold a host on investments and the more diversified the better. You can opt to invest in mutual funds, shares, options, EFTs among others. There are different types of IRAs that you should know as you set out to start planning for your retirement. They include:
- Roth IRAs
- Traditional IRAs
- SIMPLE IRAs
- SEP IRAs
When it comes to IRAs, you can opt to manage them on your own or have a financial advisor or broker do it for you. For those that you manage you can have a Roth IRA or a Traditional IRA. Here you are in charge of all the decisions including what investments to place money on. An IRA that you manage is a wise choice for you to get access to a wider variety of investment products. If you are employed, the ROTH or Traditional IRA is a better choice when it comes to setting up an IRA.
For those who are self-employed and even own businesses, the best choice for IRA is SIMPLE and SEP. Opening secures your financial future and helps you to plan for it now. Choose a bank that has been authorized by the IRS (Internal Revenue Service) to open IRAs. Other places you can set up IRAs are brokerage firms, savings and loan institutions, and credit unions.
Conclusion
There are numerous investment products or securities to choose from. You have the chance to diversify your portfolio. Once you do this, you lower the risk involved in investment. It’s better to learn how to invest than not to try at all. It’s one of the best ways you can reach your financial goals. As you start learning you can opt to invest slowly and increase gradually.