Investing 101: Types Of Investments

When people talk about investing, it's mostly centered around stocks and bonds. While sticking with these traditional forms of investment can be a smart move, especially for inexperienced and novice investors, you'll need to diversify your portfolio sooner or later. Knowing the many types of investment that you can park your capital in lets you maximize potential gains over time and minimize capital losses by distributing the risk across the board. Here are five types of investment that you can explore.

Ownership Assets

As the name implies, these are assets that are owned by the investor. These include company stocks, residential or commercial properties, precious metals, art, and even businesses that you've launched. Stocks, also referred to as equity, serve as proof of ownership of a particular company. Being a part owner of a company, albeit just a fraction of it, entitles you to a portion of its profits. As a general rule of thumb, stocks should constitute a decent percentage of your portfolio. Real estate, on the other hand, can be residential properties rented out to tenants or commercial offices leased to businesses.

Lending Assets

These are assets that pay out in interest. Basically, you purchase debt that is expected to be returned after a pre-agreed upon time. The most common type of lending investment is a bond. When you purchase a bond, you're effectively lending cash to the seller of the bond, which is often a company or a government. All bonds have expiration dates, indicating when the bond owner is expected to be paid back both the initial investment and the fixed interest rate. CDs or certificate of deposits work similarly to bonds, but are treated as promissory notes issued by banks. Compared to a savings account, CDs offer a slightly higher interest rate.

Alternatives

Investment companies divide their asset allocation into stocks, bonds, and alternatives. And since we've already covered the first two, let's see how alternatives work. At its core, alternatives are an umbrella term for assets that are based or derived from an underlying asset. For instance, REITS or real estate investment trusts allow you to partake in the purchase and ownership of large plots of farmland or malls. You then share a portion of the profits with the rest of the investors that went in with you on the deal. Another example is venture capital, which involves parking your capital on a startup or small business with the hopes that the entity grows alongside your investment.

Precious Metals

While precious metals can be categorized as either an alternative or ownership asset, precious metals don't get the attention they deserve. Gold, silver, and other rare metals like iridium and platinum are a great investment option for people who know the market and/or prefer to buy and hold something tangible. Experienced investor, Andreas Christian, advises to buy and sell only from a reputable dealer. Low prices that are too good to be true should be red flags for an investor. Also, time your purchase. It's usually best to buy precious metals during times of economic distress and uncertainty.

Cryptocurrencies

This is a newer form of investment and one that remains untested to investors. But this very fact is why cryptocurrencies, particularly Bitcoins and Ethereum, draw a lot of attention. Prices on these cryptocurrencies jump by several points on a daily basis. It can be financially challenging to get in on Bitcoin considering that its price is hovering around $4,000 at the moment, but there are other ways to invest in this digital currency, such as mining it or buying fractions of it.

It makes sense to know all your options before investing on anything. There may be assets that fit your criteria better in terms of ROI, startup capital required, risk and volatility measures, etc. The five investments listed above are only half of the equation. Over time, as you gain more knowledge and become more comfortable and experienced with traditional markets, you can expand your portfolio to new markets.