Investing is a simple way to make money. Unlike a salary, it doesn’t involve punching the clock but instead involves putting money into something that will grow in value over time—such as a stock, penny stock, mutual fund, bond, or hedge fund.
Other forms of investment include starting a business or purchasing real estate. Each type of investment has its advantages and disadvantages. The following are some of the most common types of investments available.
Stocks, also known as equities, make you a partial owner of a business or corporation. Stocks are divided into shares, which are the lowest unit which can be purchased.
Businesses have various ways of dividing and distributing their stocks. In many cases, the stocks come with specific rules or advantages of ownership. For instance, purchasing a certain number of shares may allow you to vote at shareholders meetings or share in profits designated for shareholders, also known as dividends. Other stocks do not pay dividends. Ownership of a stock is proven with a legal document called a stock certificate, which indicates the number of shares owned and their type.
Unlike other forms of investments, purchasing stocks come with risks. They are volatile, meaning their value is not fixed. Instead, it fluctuates on a day-to-day basis. Buying a stock doesn’t guarantee you anything, and some stocks do not offer dividends. You do, however, make money if your stock increases in value over time.
Compared to other types of investments, specifically bonds, stocks can provide a relatively high return on investment. But for some investors, the risk of putting money in stocks outweighs the potential gain.
As the name suggests, penny stocks are a type of stock that can be purchased for very little investment. The Securities and Exchange Commission (SEC) once designated a penny stock as any stock traded for less than $1, though they have since revised the definition to include stocks traded for less than $5. Though penny stocks now sell for more than pennies, the level of risk associated with them hasn’t changed.
Penny stocks tend to be risky investments. Most of the time, they are stocks in relatively new, growing companies with both limited resources and financial support. They have low trading volumes, and are often overlooked by investors. Penny stocks trade mostly on Pink Sheets and the Over-the-Counter Bulletin Board (OTCBB).
Potential investors should be wary of penny stocks. The potential for high profits is mitigated by even higher risks. In many cases, companies forced to trade on Pink Sheets and OTCBB are forced to do so because they can no longer maintain their position on a larger exchange board.
Bonds are a type of investment that involves loaning money to a company or bank. They are based on debt. Organizations that have large debts, such as corporations and governments, sell bonds in order to mitigate debt. When you purchase a bond, you are loaning money to the organization. They pay interest on the bond and after a fixed amount of time, they repay the principle you loaned.
The largest advantage of bonds is that they are relatively stable as far as investments go. If you purchase the bond from a stable government, the return on investment is practically guaranteed—even risk-free. But as you might expect, the decreased risk associated with bonds also means that the potential for profit is low. The return on bonds tends to be lower than other types of investments.
A mutual fund is a collection of investments. When you purchase a mutual fund, you are combining your money with other investors’ money to buy stocks and bonds in bulk. You are also paying a professional investor to manage and select the investments for you. Mutual funds are often curated with specific characteristics in mind. They might focus on government bonds, company bonds, large stocks, small stocks, stocks in particular countries or sectors. They might focus on low-risk investments or investments with a high potential for profit.
One of the primary advantages of putting your money in a mutual fund is that you don’t need to have knowledge or expertise in the area of investing, and can instead trust a professional to make a secure investment on your behalf. In theory, you should get a higher return on your money by trusting your money to a professional. However, that’s not always the case. In addition, investors are often paid on commission, which means they take a cut of the profits.
Like mutual funds, hedge funds are a type of investment that involves pooling funds with other potential investors. In addition, they are managed by a professional who chooses the investments and securities in a single portfolio according to performance or other features. The largest advantages of both hedge and mutual funds are that the investment is diversified and professionally managed.
The main difference between hedge funds and mutual funds is that hedge funds involve a more aggressive management style. Hedge fund managers may select speculative positions in derivative securities, including options. They also have the option to short sell stocks. These things increase both the risk and the potential for return on the investment of the fund. Hedge funds come with more market leverage, which means that they may increase in value even when the market is failing, which rarely happens with mutual funds.
In addition, hedge funds are generally only available to highly experienced investors, who typically have high net worth. In the United States, they are called “accredited investors.” Mutual funds, on the other hand, are available to any type of investor.