The investing world is vast and diverse, ranging from certain types of investments where millions of trades are executed every day, to more unique assets that may be sold once in a generation. Whether you are just getting started investing or you are an experienced investor, it can help to know what you can buy and sell.
Here’s a rundown of some of the investments that you can choose from.
Stocks and bonds are among the most commonly known investments. Along with cash, these are known as traditional investments.
- Stocks give shareholders a share of ownership in a company. Investors purchase stocks hoping they will go up in price, to earn dividend payments (if the company distributes some of its earnings to stockholders), and to vote shares and influence company decisions. Stocks can be categorized in many ways, including as growth stocks (where investors hope the company and stock price grow rapidly), income stocks (where investors seek consistent income), and value stocks (where investors seek stable returns). They can also be classified by size: Large caps (the largest-size companies), mid caps (relatively medium-sized companies), and small caps (the smallest companies). Stocks are generally considered to have more risk and return potential compared with bonds.
- Bonds are debt investments—similar to an IOU. Borrowers sell bonds to raise money for a certain amount of time. When you buy a bond, you are entitled to receive a specified rate of interest during the life of the bond and to receive back your original investment (also known as the principal or face value) when the bond comes due after a set period of time. Types of bonds include government, municipal, and corporate. They can be categorized different ways, including investment grade (i.e., those that have a higher credit rating, implying they are relatively less risky) and high yield (i.e., those that have a lower credit rating, implying they are relatively more risky).
Stocks and bonds are the most common components in mutual funds and exchange-traded funds (ETFs), which are baskets of investments combined into a single investment option. Mutual funds and ETFs pool money from many investors and invest all that money collectively. Investors can buy shares in a mutual fund or ETF, with each share representing part ownership in the fund. Among the differences between these 2 investment choices: ETF share prices fluctuate during the day on a stock exchange, while mutual funds are valued at the end of the trading day. Because they are baskets of investments, mutual funds and exchange-traded funds may help you more easily build a diversified portfolio.
Options are another type of investment that commonly utilize traditional investments. Options are contracts that give buyers the right and sellers an obligation to buy and sell an underlying asset (such as a stock) at a specified price, up and until a specified date. Options contracts are listed on the option chain—a list of all the options available for an underlying investment.
Alternative assets are investments that are relatively more complex and less liquid (i.e., not as easy to buy or sell) compared with traditional investments. It's important to understand that there are more risks with these relatively complex investment types and that they are not suitable for all investors. Types of alternative assets include hedge funds, real assets, private equity, and structured products.
- Hedge funds are the largest category among alternative assets. A hedge fund is a privately organized investment vehicle that is less regulated by government than traditional funds, enabling it to invest using a wide variety of strategies in nearly any investable asset. This group also includes managed futures, which is a type of hedge fund that invests in futures contracts—commonly stock, bond, commodity, and currency futures.
- Real assets are investments in assets through direct ownership, and not via financial assets (e.g., stocks). Natural resources, commodities, real estate, infrastructure, and intellectual property are the most prevalent real assets. Examples of natural resources are water and timber. Commodities—which differ from natural resources in that they are extracted, mined, or produced—are homogenous and available in large quantities. Examples are oil, gas, coal, gold, silver, copper, steel, iron, and livestock. Real estate is land and improvements that are affixed—like houses or office buildings. (Note: Real estate investment trusts, commonly known as REITs, can be viewed as a traditional investment). Infrastructure includes toll roads, ports, airports, and other real assets that are typically under public control.
- Private equity invests in stock or bond positions that are not publicly traded. Private equity investments typically involve financing higher risk start-up companies.
- Structured products are investments that are created to generate a specific return, risk, taxation, or other attribute. They include credit derivatives, annuities, and other products.
Of course, the list of alternative assets is not restricted to these categories—it can essentially include anything that is not a traditional investment. Rare art, collectibles, and other tradeable assets are additional examples of alternative assets. More recently, cryptocurriences—like Bitcoin, Ethereum, and Tether—have gained widespread attention, along with non-fungible tokens (NFTs).
The more you know
Whether you are building or managing a diversified portfolio, and/or trading with some percentage of your investment money, knowing what choices you have can help you build your plan. As always, when considering any investment, be sure that it aligns with your objectives, risk tolerance, and any other factor that is specific to you.