BLOGS
Types of Investments and How They Work
Undoubtedly, COVID-19 has made way for many surprising turn of events across the globe—one of which is the people’s sudden interest in financial literacy education. The New York Times reported that the pandemic has indeed helped in bringing attention to the topic that there are now two dozen state legislatures in the United States who consider bills to push for financial literacy education. Proponents say that one of the reasons behind this interest on the topic is because of the increasing awareness on the inequality caused by the ongoing global health crisis, economically speaking.
When financial literacy education is being discussed, it is inevitable to talk about investments. For many years, people are intimidated by the word itself as it does not sound like a game for regular people. Fortunately, with more financial advisors assisting many in becoming educated on the subject, an increasing number of people are beginning to grow their finances by providing more opportunities for growth.
Making an Investment Plan
Despite the available resources on the web and easier access to financial advisors these days, making an investment is not to be taken lightly. Unless someone affords to lose a truckload of money, investing requires education and careful planning.
It is not just about choosing the stocks to put the money in, there are considerations that must be studied first before allocating resources to a particular investment option.
For someone who is interested to make an investment soon, here are some of the steps to do prior shelling out money to invest.
Evaluate the Financial Situation
First things first, is the current financial situation ready for making an investment? There is no question that one needs money to invest. What a potential investor needs to determine is how much money they can and should set aside for investing.
To effectively do this, people are being encouraged to look into their monthly income and see the excess amount after subtracting the money set aside for emergency savings and expenses. This should show a clear amount that can be put into an investment rather than letting it sit in the bank or worse, be spent to unnecessary purchases.
Determine Financial Goals and Time Horizon
The next important step in making an investment plan is to determine one’s financial goals and time horizon. There should be a clear purpose in doing so and a timeline of how long until the investor begins to pull out the investments.
Simply put, the question to ask is “Why invest?” This should answer what the investor is hoping to earn money for. Is it to buy a house? A car? Put up a business? Or retirement? Having this all figured out will help an investor make an informed decision on what type of investment to choose and will help in monitoring and even rebalancing the investments in the future. Also, it will help in considering how liquid or accessible the investments need to be. For someone who needs cash, a buy-and-hold investment like real estate will not work compared to putting money in the stock market where assets are more liquid.
In investing, there are three types of goals: safety, income and growth. Safety is safeguarding or maintaining one’s wealth; income is when the investments is meant to provide cashflow or active income; growth is to continuously build wealth over a period of time. Once a potential investor determines what is ultimately the goal in making the investment, choosing the type of investment will be a lot easier.
Choose a Type of Investment
Before making an investment, understand that the risks and returns are correlated. A person who chooses to invest in a low risk investment should expect a low return, and those who choose the ones with higher returns should understand that there are higher risks that come with it.
To understand the world of investments better, here are some of the most common type of investments that a potential investor can choose from.
Types of Investments
1. Stocks
Stocks, also called as shares or equities, is probably the most popular investment type. To explain it briefly, investing in the stock market means that an individual is buying shares of ownership in a public company. This makes an investor a shareholder, betting that the company will perform well over time. If this happens, it will make the shares more valuable making more investors to take interest in it. Here comes profit—when investors sells their shares in a more expensive price than the amount they bough it with.
During the pandemic, there is a surge in activity across all trading platforms and the increasing number of first-time traders. The CNBC reported that plenty of the recorded first-time traders during the pandemic are in their 20s and 30s who now find the stock market accessible.
2. Bonds
Bonds are popular for investors who want to diversify their portfolio. It is a type of investment that suits those who want less risks than stocks.
So, what are bonds? Basically, buying bonds means that an investor is agreeing to lend money to an entity—a company or government agency—and earn money through interest. There are different types of bonds which includes corporate bonds, municipal bonds, savings bonds, agency bonds, and treasury bonds.
The payments on a bond can either be a fixed rate or floating rate. As the name suggests, a fixed-rate bond means that the company or government agency agrees to pay the fixed-rate interest to the investor over a period of time. Floating rate bonds, on the other hand, has a variable interest rate that changes according to the prevailing market interest rate which offers more possible gains to investors.
3. Cryptocurrencies
Cryptocurrency is the term used to describe digital money. This currency is being secured by blockchain technology which resembles an old-fashioned bookkeepers’ ledgers except that it is now digital. In the recent years, many investors all over the world have been investing in cryptocurrency and it is now one of the most buzzworthy assets available to potential investors.
Among the many types of investments listed in this article, cryptocurrency is one of the complicated ones especially for beginners. Even though this type of investment is also done online using a cryptocurrency exchange, there are thousands of cryptocurrencies existing such as Litecoin and Ethereum. Although, there is no question that the most popular one is Bitcoin.
Up until now, there is still debate whether cryptocurrency is a legitimate and worthy investment. Whatever the future is for cryptocurrency, one thing is sure—investing in this asset is not for the conservative. Cryptocurrencies are considered risky investments. The prices are volatile compared to other assets and have a huge chance to be affected by regulatory changes in the near future.
On the other hand, many experienced investors are attracted to cryptocurrency. An investment tip for a newbie, make sure to carefully research the digital coin before purchasing. Also, be mindful of the transaction fees as it varies from one cryptocurrency to another.
4. Mutual Funds and Exchange-Traded Funds (ETFs)
Mutual funds are amongst the most common investment products available through financial advisors in the Philippines. Many insurance companies introduce the basic of investments by integrating mutual funds in their products.
What is a mutual fund? It is a form of investment in which money from multiple investors is pooled and invested in multiple companies. This type of investment can be managed either actively or passively. The former, actively managed mutual fund, means that the investor has a fund manager who will expertly pick the securities to put the money in. While the latter, a passively managed fund, is following a major stock market index as reference in allocating the funds. As mutual funds involves investing in companies, the risks are the same with stocks and bonds but the upside is that the investor’s fund is being diversified.
On the other hand, Exchange-Traded Funds (ETFs), even though much similar to mutual funds, are only being sold and bought on the stock market instead of fund companies. ETFs also refers to a pool of investments that tracks a market index but its price changes throughout the trading day. Unlike a mutual fund which is only the net asset value of the investments and is being calculated at the end of each trading session.
ETFs are also more diversified than stocks so it is highly recommended for newbies because of the lower risks. Both mutual funds and ETFs can provide a return of investment when sold at an increased value.
5. Certificates of Deposit (CDs)
Potential investors looking for a very low-risk and long-term type of investment might find Certificates of Deposit (CD) the best among all the options in this list. Basically, CDs work with investors giving the bank an amount of money that will be returned after a specified period of time. When the time is over, the investor can get the principal amount together with the interest predetermined before the investment. Most of the time, the longer the period of time means a higher the interest rate.
The secret to making a good investment out of CDs is by looking for the best rates in different financial institutions. Nowadays, there are many online banks and credit unions that offer better interest rates compared to typical banks. Sometimes, there are also special promotions that investors can take advantage of to make money by getting better interest rates and durations.
6. Retirement Plans
Many people are investing to save up for retirement. Good thing, there is a type of investment that caters specifically for this purpose—retirement plans. Some employers offer retirement packages called Workplace Retirement Plans but for those who do not find it sufficient, they can get their own Individual Retirement Plan (IRA).
Before investing money into an IRA, one must figure out the preferred retirement income goals. It includes implementing a savings model to achieve those goals and managing the risks involved. Many insurance companies offer services to manage funds intended for retirement. It is recommended to discuss options with a financial advisor when it comes to retirement plans.
7. Annuities
Insurance products, especially those who avail of retirement savings plans, usually use annuities. When investors purchased an annuity as part of the insurance, they will get periodic payments of the invested funds in the future. This will help the annuitants in case they live longer than what their savings can sustain.
Simply put, people use annuities as an additional source of income during retirement. It is mostly low-risk but the rate of return is also not high. To most people, it probably won’t be enough for retirement so it is best to treat an annuity only as a supplement.
8. Options
The word “options” in the investment world refers to versatile financial products that is based on the value of securities like stocks. An options contract offers the buyer an opportunity to buy or sell an asset. Basically, investors lock in the price of a stock hoping that its value will go up. The risk is when the stock decreases from its price, the investor will also lose the money of the contract.
Options are not for beginners as it is considered an advanced investing strategy. For beginners, it is best to try the easier types of investments first before getting into this one.
9. Commodities
Commodities, from the word itself, are tangible products that people can invest in. It is a way for professionals to protect their resources during inflation—by investing in the commodities. However, investors must exercise caution because prices fluctuate sharply and abruptly due to a variety of external factors, including weather issues that directly affect agricultural products.
The four main types of commodities include metals, agricultural, livestock, and energy.
10. Real Estate
A more traditional way to invest the money that is just sleeping in the bank is through real estate. This may take more work than the ones listed above, which mostly can be done through online channels, but real estate has been proven to be a safe and lucrative market to invest in over the years.
Aside from buying and selling a property, there are other options when it comes to real estate. Investors can do house flipping or rent out the property. The former is known for its profit potential while the latter is best for a passive yet steady cashflow.
Start Investing Today!
From this list alone, there are indeed plenty of different types of investment that potential investors can choose from—several of which are suitable for newbies. Still, one’s hard-earned money is involved so it is best to do a thorough research before investing. Each type of investment also comes with a different level of risk and some answers to very specific income goals so careful planning is recommended.
Ready to be an investor? There are two primary methods for purchasing various types of investments. First, you can open an online brokerage account which is the quickest and most affordable way to buy stocks, funds, and other types of investments.
However, this will require legwork from the investor as they need to manage their own stocks. If this sounds too much work, a more passive way to invest is for you to get an advisor to manage the funds. Of course, it comes with a management fee that the investor needs to take care of.
As for real estate investments, depending on one’s purpose and budget, an investor can look into different developments—one of which is Brittany Corporation, the leading luxury real estate developer in the country. Brittany offers the most beautiful houses in the Philippines that are perfect as vacation homes or for everyday residential purposes. These luxury homes are located in themed communities located in prime cities a little south of Metro Manila. It has the best combination of accessibility to the metro with a taste of the suburbs.
Get to know more of Brittany’s luxury real estate developments! Send a sales inquiry via this link or follow Brittany’s social media pages for the latest updates.
