7 Types Of Investments For Beginners: Your Guide To Investing (2024)

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You get the point – I was very skeptical about trusting some one else with my money!

As the years went by, I have also heard countless folks asking similar questions. Over the past couple of decades, there has been a significant shift in not only the investing options available but also in the way we invest.

Artificial intelligence is now beginning to play a role in investment decisions and recommendations made by many experts and industry gurus. These days, automated robo advisors can predict market moves and provide suggestions to align your portfolio with economic and market conditions.

So, the million-dollar question – If you are just getting started, where should you invest your hard-earned money?

As a millennial who experienced the 2008-2009 Global Recession, I was somewhat clueless and skeptical.

My approach was: One step at a time!

Before you take a deep dive, I’d suggest you carefully read and understand the below 3 key aspects of investments:

a. Know Your Risk Appetite:
You need to know your risk appetite. This is the key! Not everyone is the same, and hence you need to cater your investment choices based on your risk appetite. Thanks to Schwab, you can find your risk tolerance level here. Once you know your risk tolerance level, you can look into company stocks that fit your style and goals.

c. Diversification
Even if new to investing, I am sure you must have heard the saying: Never put all your eggs in one basket. Diversification is precisely that – do not put all your money in only stocks or bonds or mutual funds or ETFs.

Now, let’s look at the 7 types of investments for beginners:

1) Stocks

A stock is also known as an “equity” or “a share” in the financial market. It is a type of security that gives the buyer the opportunity to own a proportion in the issuing company. In exchange, the issuing company gets money based on the number of stocks purchased.

Stocks are one of the most commonly traded securities in the financial market. They are very popular both with banks and retail investors (like you and me) because of the ease of transacting. Stocks can be traded on exchanges like DOW, NASDAQ and NYSE and both the buying and selling happens online.

As they say, investing is both an art and a science. It is right in the case of stocks individually. People buy and sell shares based on the company’s health and performance (fundamental analysis) and(or) by looking at charts, historical trends and price movements (technical analysis).

Investing in stocks yields higher returns in lesser time than most other forms of investing (depending on a lot of factors though). For this reason, investing in stocks is one of the most popular types of investments for beginners across the globe.

So, what do you need to get set up for trading stocks?

• Clearly defined risk appetite from above – you can use Low, Medium and High to start with
• A brokerage account
• Funds set aside (no matter how small the amount) apart from your savings and emergency fund

For brokerage accounts, look at Fidelity, TD Ameritrade, Etrade, Charles Schwab to set up your account. Your focus should be to have a brokerage account that not only allows you to trade cheaper but also provides learning tools, webinars, and easy to use trading platforms.

I use Fidelity, TD Ameritrade, and Etrade.

I highly recommend you choose at least a couple of brokerages accounts. This will help you understand the pros and cons of each, and you can ultimately make one of them your primary one.

Stocks can be classified into 3 categories:
a) Growth Stocks
b) Value Stocks
c) Income Stocks

a) Growth Stocks

Growth stocks are stocks of those companies that have significant potential for future growth. The pace at which these companies grow is faster than the other companies in the market.

From a revenue standpoint, growth companies attribute their current revenue toward future expansion. They also focus on reinvesting their profits back into their business to promote innovation and advancement.

Examples of Growth stocks:

b) Value Stocks

Stocks that are undervalued and have more value than currently perceived are called undervalued stock. This means that the value stock is currently trading at a price lower than where it should be based on the company’s financial position.

Also, there could be a one-off operational or business related issue with the company that led to a temporary drop in stock price.

Value stock carry less risk vs. Growth stocks and investors who do their homework realized the upside and buy the stock.

Examples of Value stocks:
–3M – MMM
–Aflac – AFL
–Bank of America – BAC

c) Income Stocks

As the name implies, income stocks are those that provide steady and regular dividends (income.) Most of the income stocks have low volatility vs. the overall market and they offer higher dividend yield (return.)

If you are a conservative investor, income stock could be a good addition to your portfolio. Income stocks are less riskier vs. growth and value stocks.

Examples of Income stocks:
–BP – BP
–Citigroup – C
–Walmart – WMT

2) Bonds

Bonds are classified as debt instruments – meaning you are going to loan money to a company and in return, they pay you interest periodically (usually semi-annually) Bond has a maturity period, and once the bond hits maturity, you get the initial amount loaned to the company, back.

Investment in bonds is less risky than stocks. A bond’s value will not fluctuate sporadically day over day. Interest rates are a key factor in the determination of the bond’s value.

A bond’s value will either rise or fall depending on the direction of interest rates. Bonds are a great investment for those who like safer and conservative investment tools.

It provides the much-needed balance to your portfolio and brings in regular interest payments that you can re-invest.

So, how do you make money by investing in bonds?

• The first option, hold the bond until the maturity and keep collecting those interest payments
• When the bond’s market value rises, you can sell it and pocket the difference between your buying and selling price

Unlike stocks, you cannot trade bonds through the exchanges. Bonds are bought and sold through brokers (referred to as over-the-counter OTC). This does make it a little challenging to buy and sell bonds. But, there is enough opportunity to add a steady income flow to your portfolio so I would encourage you to go that extra mile!

For a balance portfolio, Bonds are one of the popular types of investments for beginners.

Your best option is to reach out to your brokerage firm for investing in bonds.

According to US News, here are the best Corporate Bonds to invest.
According to US News, here are the best Fixed Income funds to invest.

3) Mutual Funds

Mutual funds are also called “pooled investments.” As the name suggests, mutual funds take money from the investors and allocate into stocks, bonds, and alternative (other) investments. The fund’s prospectus will call out the investment vehicles you can invest.

Investors who are risk-averse, prefer mutual funds as one of the top-rated investments. It will spread out your dollar across different types of investments, and this allows the fund to diversify instantly.

Investing with mutual funds is a little different from stocks. It is very difficult to invest in a mutual fund today and make double-digit returns the next month.

When mutual funds increase in value, the profit increases and the investors receive the distribution.

Investors can re-invest this profit and in turn, earn a higher return on the re-investment. The key to making money with mutual funds is to invest consistently over a long period of time.

Invest in funds that have proven track record and those with better returns (above average vs. competitors)

To invest in a mutual fund, you have couple options:

1. You can buy the funds directly from the company that created them (like Fidelity, Vanguard, etc.)
2. You can buy it from your brokerage firms that offer a wide range of buying options.
   

According to US News, here are the best mutual funds to invest.

4) ETFs (Exchange Traded Funds)

ETFs are like cousins to Mutual Funds. They are pooled investments that pool investor money into stocks, bonds, and alternative investments.

ETFs trade just like stocks on the stock exchanges and are valued constantly when the market is open.

ETFs offer instant diversification similar to mutual funds and for this reason, investors carry certain portion in their portfolio.

Both the buying/selling and investment methodology differs between an ETF and Mutual fund. Also, ETFs are prone to higher price fluctuations as they trade similar to stocks.

According to US News, here are the best ETFs to invest.

5) Certificates Of Deposits (CDs)

These are considered one of the safest investments. Federal Deposit Insurance Corporation (FDIC) insures the CDs which means you will not lose your money.

You need to invest in CDs for a set time frame. This means that your funds are locked in and cannot be made accessible. If you need to access, you have to pay a penalty for early withdrawal.

Now, because the risk is very low, interest is low too. It is comparable with the interest on a savings account.

If you do not want to carry the risk of penalties and think you need access to the funds, you are better off parking your money in a savings account.

Most brokerage firms offer CDs as an investment option so you can easily invest in one.

6) Individual Retirement Accounts (IRAs)

If you’d like to earmark funds for retirement, then you can invest in IRAs. Investments within an IRA include financial products like stocks, bonds, mutual funds, ETFs, etc.

The two most commonly used IRAs are Traditional and ROTH IRAs.

a) Traditional IRAs

For the most part, traditional IRAs can be tax deductible. This means that you can put money in the traditional IRA and deduct it while filing for your taxes. The IRS will not charge you tax on the amount you put toward the traditional IRA account.

Upon retirement, when you withdraw money from this account, IRS will tax you on the amount you withdraw.

The age limit for avoiding the penalty for early withdrawal is 59 1/2. As of 2019, for a single person (or as a head of the household) with a modified adjusted gross income (as defined by Investopedia) of $64,000 or less, the IRA contributions are fully tax deductible. If you are married and filing jointly, the limit is $103,000 or less.

b) ROTH IRAs

On the flip side, Roth IRAs are not tax deductible. This means that you invest in this account with your after-tax dollars. There is no tax on the amount of interest or profits you make on the invested dollar.

Upon retirement, when you withdraw money from this account, IRS will NOT tax you on the amount you withdraw.

7) Savings Account

This is probably the safest and risk-free investment available. Due to the nature of the account, you won’t be able to stretch your dollar far. The interest is meager on these accounts, and usually, there are no penalties.

A good strategy is to park a specific chunk and keep earning interest on those funds. You can also use this account for emergency purposes and so it would be a good idea to have some money readily available in the savings account.

Summary

In summary, follow the below checklist when choosing investments:

• Risk-appetite
• Budget
• Your understanding of the types of investments
• The market you are investing in (bull or bear)
• Interest rate fluctuations
• Inflation
• Affordability of investments
• Fees for managing mutual funds and ETFs
• Brokerage Commissions for trade execution