For novice investors, it is important to learn about the different investment options available to you. Different types of investments have different levels of risk and different ROIs. You should choose an investment that suits your investment style, whether you are risk averse or risk-loving.
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Types of investments include:
When you purchase stocks you are becoming part-owner of a company. Investors who choose to invest in stocks get a say in shareholder meetings and are entitled to a portion of the company’s profits. It should be noted, however; that not all stocks pay dividends. Some stocks will only return your investment if they increase in value. Stocks are more risky than other investment options but they have the potential to provide high returns.
Bonds are like writing an IOU for a company or the government. You are giving them money for a certain period of time and they will pay you back the money, with interest, over time. Bonds are ideal for risk averse investors because they are relatively low-risk. If you purchase a bond from the government you are more or less guaranteed to get your money back. Due to the fact this investment type is relatively risk-free the rate of return is generally lower than most types of investment.
Cash Equivalent Investments
These investments protect your initial investment and let you have access to your money. These are typically low-risk investments that have a low-rate of return. They are ideal for short-term security and are a highly liquid investment option. Cash equivalent investment types include treasury bills, passbook savings account or money market funds.
Buying a mutual fund involves pooling your money together with other investors and having it professionally managed. Mutual funds have a pre-determined investment objective and are ideal for novice investors that don’t have specialized knowledge. The rate of return and risk level of a mutual funds depends on the type you buy.
Other investment options include derivatives and commodities. Investing in these options often requires a more specialized knowledge of the stock market.