When it comes to investing, it can often feel like there is no clear way to make smart decisions. With the countless options and opinions the obvious path can seem far from clear.
Despite this confusion and complexity, the best way to deal with this is by simplifying the decision. The following is a list of four of the leading investment groups and how you should approach them.
When most people think of investing they think of stocks. Stocks are pieces of ownerships in a company that entitle you to the earnings, dividends and appreciation of the company. There are literally thousands of stocks in the U.S. and many thousands more around the world.
You can buy stocks by yourself through a brokerage account, or you can purchase a basket of stocks called a mutual fund. Mutual funds are either actively managed or passively managed to track an index.
Just as in purchasing stock, bond ownership involves handing money over to a company, agency or government entity. But this time, instead of receiving ownership you receive a right to assets. With a bond you are lending money with the expectation of receiving regular cash payments at a specified interest rate. At the end of the bond term you receive your money back.
You can buy corporate bonds, which are the riskiest, or you can buy agency bonds, or government bonds, which are clearly safer.
Instead of buying company ownerships (like with stocks) or lending (like with a bond) commodities are ownership of a physical resource. If you believed gold was undervalued you could buy gold with the expectation of it going up in the future. This would be commodity trading.
The thing with commodity trading is that it tends to be more of a speculation game than an investment decision. While this doesn’t mean you should stay away from all commodities all together, it does mean you should be careful about how much you buy and sell this speculative option.
Stocks represent company ownership. Bonds represent lending. Commodities represent physical resource ownership. Derivatives, like all these things can be bought and sold on an exchange. However unlike all these assets, derivatives’ price isn’t based on an underlying asset or lending agreement, but rather is based on other financial assets and their behavior.
For example if you were to buy a put option on Apple (AAPL) you would have the right to sell AAPL at a certain price at an agreed upon time. So while you wouldn’t own apple directly, you would benefit from it’s fall in price and lose from it’s increase in price.
These four forms of investment are by no means a complete list of all your investment options. But they do represent possible options for you to consider with your financial planner. Make sure to talk with an investment advisor about the next steps.