Want to start investing but feel overwhelmed?
You’re not alone. There are so many options and it can be hard to know where to start. Here’s a brief overview of 6 types of investment accounts. Use this information as a guide when starting to think through investments.
1. Stocks
Stocks are a type of investment that represent ownership share in a publicly traded company. A publicly traded company is one that is listed on a stock market exchange like Nasdaq or the New York Stock Exchange (NYSE). Many of the largest and well-known companies, like Apple and Amazon, are publicly traded. That means you can buy stock in them.
Public companies sell stock through a stock market exchange to raise money to grow their business. Investors purchase stocks in hopes of growing their money in a way that outpaces inflation. Stock prices fluctuate throughout any given day and are subject to market conditions. Purchasing stock isn’t guaranteed to increase your net worth. Companies can lose value or go out of business. However, investors who do the best tend to purchase their stock and hold them for a long time before selling. Take Amazon for example. Amazon was valued at $18 per share when it went public in 1997. Today, Amazon is worth $3,049. If you would’ve purchased one share of Amazon in 1997 and sold it today, you’d make $3,031. That’s not a bad return on your initial investment.
2. Bonds
Bonds are similar to stocks. When you buy a bond, you’re essentially loaning money to a company or entity. There are three types of bonds: corporate, municipal, and treasury. Companies issue corporate bonds. Local governments issue municipal bonds and the United States (US) Treasury issues treasury bonds. Unlike stock, bonds come with less risk because the entity pays them back at a regular amount with a fixed interest rate (coupon rate). It’s for this reason that bonds are considered a type of fixed-income security. However, less risk also means they typically have a lower rate of return. Here’s how they work: You purchase a bond for $1,000 which essentially means you’re loaning an entity that $1,000. The loan has a 10-year maturity date and a coupon rate of 5-percent. The entity pays you $50 per year for the next 10 years. After 10 years, they pay back the original $1,000 of the bond and you made $500 off of your investment ($50 x 10 = $500).
3. Mutual funds
A mutual fund essentially pools money from different investors so they can invest in a large group of assets (securities) like stocks and bonds. In actively managed mutual funds, professionals manage the holdings that make up the fund’s portfolio for a fee. They buy, trade, or sell shares on behalf of the fund to help the investors get the most return for their money. Mutual fund portfolios are often diversified, meaning they contain stocks and bonds. As a result, they come with the same financial risk.
Mutual funds are one of the most common types of investment accounts because they’re easy to use, affordable, and diverse.
4. Exchange-Traded Funds
Exchange-traded funds (ETFs) are like mutual funds because they represent a pool of investors. The difference is in how the funds are purchased. Mutual funds are purchased through a fund company. ETFs are bought and sold directly on the stock markets. As a result, their price fluctuates throughout the day. There are many different types of ETFs and each of them comes with their own risks and rewards. Despite this, ETFs are often a great way for new investors to enter the stock market.
5. Certificate of Deposits
Certificate of deposits (CDs) are offered by banks and credit unions. They’re like a hybrid savings and investment account with very low risk. Basically, you agree to deposit a fixed amount into an account and agree not to touch it for a specified period of time. In return, you earn a higher interest rate than you would in a standard savings account. You can withdraw your initial deposit (principal) plus interest earned after the stated period is over.
There is virtually no risk with CDs. They are federally insured by the FDIC up to $250,000 so you would get your initial deposit back even if your bank were to collapse. However, the downside is the interest rates are much lower than bonds. The average interest rate for a CD is 0.28-percent.
6. Retirement Plans
Planning for retirement is a key part of any financial plan because you want to be sure you have enough money to live comfortably when you’re no longer working. There are four types of retirement plans. Two of them, 401(k) and 403(b) plans, are employer-sponsored. The other two, Traditional and Roth IRAs, are self-sponsored. Oftentimes employers will offer matches for employer-sponsored plans. These are just 6 of the many different types of investment accounts available. Talk with a financial advisor to discuss your situation. They’ll help you identify the best investments for you and help you get started.
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