Mutual funds, stocks, bonds, real estate, ETFs, closed-end funds, and a variety of other investments. Being a small business owner, you probably already know there are so many to choose from. Additionally, owning a business is also considered an investment.
While the following information will give you an idea of the different investments you can put your money into, keep in mind there a new investment opportunities ready to present themselves to you all the time. Be sure to do your research on investment possibilities for you depending on your income, personal needs or wants, and choose the best investments for yourself. Seeking the help of an investment expert can also be beneficial, especially if you are thinking of making your first investment.
This guide will help you understand the different factors that these investments have. By educating yourself to the various types of investments you can make, you will be ready to choose the type of investment you are most interested in.
1. What are Stocks?
Simply put, stocks are company shares that give you a chance to participate in a company’s success, you are a shareholder when you buy stocks. If the company you’ve bought stock for has an increase in their stocks, your stock prices will increase as well. The same effect occurs if the company’s stocks decrease in price, then so do your stocks.
Being a shareholder in a specific company’s stock, means that you have a claim on their assets, but you do not own the assets. If you are a holder of common stock, you also have voting rights at the company’s shareholder meetings, as well as the right to receive dividends offered. Those shareholders that hold preferred stock do not have voting rights, but on the other hand, the do receive preference over payment terms and and any dividends that were declared.
2. What are Bonds?
Investing in bonds has been around for over a century, and it is the safest way to invest your money. While you may see this referred to as stocks and bonds, they are truly different. When you purchase stocks, you own a little piece of the company that you purchased the stock from. Bonds on the other hand, are different.
By purchasing bonds, you are actually lending money to the company or institution that you purchased it from. As an example let’s say you purchase a school bond. In hindsight, buy purchasing this bond, you are lending money to the school district that will be used for improvements, new buildings, new equipment, or virtually anything that they need funding for. This can range from new high schools to books, computers, updated equipment, and more.
In other words, you are lending them money that will help improve and grow their business.
3. What are Mutual Funds?
Another popular investment that investors make is in mutual funds. These work differently than stocks and bonds. Mutual funds are perfect for beginners in the investing game. They are easy to understand and are easily accessible to their investors.
Mutual funds are often held in 401K or IRA contributions. Experts say that people are more likely to own shares such as mutual funds instead of individual investments. Mutual funds to have some unfortunate drawbacks though, they charge fees, and it’s possible that they could raise your tax bill even if you don’t sell any of them for that year.
4. What are ETFs?
An investment type that is often overlooked are ETFs which stands for Exchange Traded Funds. ETFs are very similar to stocks in the fact that they are traded on the stock exchange. ETFs hold assets such as stocks, commodities, or bonds. They are designed to keep trading as close to its net asset value as possible.
Unlike mutual funds, ETFs are traded like they are common stock on the stock exchange. Also, their prices can change through the day when they are being bought or sold.
Key differences between ETFs and mutual funds include:
They are cheaper than mutual funds
ETFs are index-tracking, where mutual funds are not. Index tracking means that they seek to match returns and the price movement of an index. ETFs are traded with other investors which helps to keep their costs lower.
ETFs are more tax efficient than other types of investments.
5. What are Real Estate Investments?
Real estate has always been a booming business to invest in. Whether you invest in real estate properties to earn rental income, buy your own house, flip houses, or invest in commercial buildings, real estate has a long history that is not ready to end yet. But did you know there are REITs that you can invest in also? Most people do not.
REIT stands for Real Estate Investment Trust. What this means to you is that an REIT is a security that combines the best things about real estate investment including benefits of stocks tied to the land, apartment buildings, shopping malls, and most any other type of real estate.
In short, REITs are companies with portfolios of real estate properties and mortgages that anyone can buy shares of. REITs are traded publicly, and they give you the benefits of owning a piece of real estate without having to be its landlord. What you are doing is investing in a portfolio of real estate, and not an individual property, REITs can be sold quickly. Additionally, since you are investing in a portfolio instead of single property, your financial risk decreases.
6. Alternative Investment Sources
Aside from those listed here, other types of investments you can make include:
Family Limited Partnerships –oftentimes, family members will want to put their money together for some type of investment. Forming a family limited partnership can also lower estate taxes and gift taxes. A popular way of doing things is to give away a piece of the partnership to your heirs every year.
Hedge Funds –most hedge funds are created as limited partnerships. These limited partnerships consist of a general partner and other investors who have put their money together into an investment.
Options –with this method of investing, you must buy or sell a stock at a set price, and in a certain amount of time if you choose to do so. Option contracts are flexible and you do not have to buy or sell the stock you have invested in, they give you the option of keeping or selling the stock. Option contracts are usually made up of 100 shares of a specific stock.
When buying an option you are only buying the contract, not the actual stock. What you are doing when buying an option contract is locking in the price of the stock that you think will increase over time. If you are correct, you’ve purchased the stock for less money but earned money on it. If you are wrong, the only thing you’ll be losing is the price you paid for the stock.
401K or another employer retirement plan –most everyone has heard of 401K, it is invested in through your current employer. For pennies on the dollar, you can invest in a 401K plan or other retirement plan that your employer offers,and your contribution will come right out of your paycheck, so you will not need any money down.
Low risk investments that have high return ratios –by now you’ve realized there are several investment types available to you, and many cost little money to get started. Here is a quick list of low-risk investments you can make that often offer higher return ratios.
Dividend paying stocks
High interest savings accounts
CDs (certificates of deposit)
TIPS (Treasury Inflation Protected Securities)
Money market funds
Credit card rewards
Cash value life insurance
Online checking account
While this is just a comprehensive list of what is available to you, be sure to consult with your accountant or another certified expert in investment to find out what type of investment you should make. They will be able to give you the rundown on what all types of investments mean to you and they can even help you decide which type of investment is best for your lifestyle, your finances, and your personal needs.
7. The Golden Rule of Investing
Yes, there is a golden rule of investing. This rule is as follows, never, invest more money than you can afford to lose. It really is that simple.
In order to survive should your investment strategies crash, you must keep a nice cushion of money for everyday living expenses like food, shelter, clothing, and all other expenses you will need to survive. Investing your money into something, could just as easily blow up leaving you penniless, especially if you’ve investing your entire pocketbook.
Investing is never a sure thing, one minute you could make thousands and then the next day, your thousands are gone, just that quickly. During your investing journey, make sure you are not investing over and above what you can afford. Aside from that, good luck on your journey!