Common investment categories
While there are thousands of different investments to choose from, there are five common categories called “asset classes” in which they are organized. You may find that you prefer only one asset class or a blend of all five in your investment portfolio. Take the time to learn about each class and if they fit your goals and, more importantly, your risk tolerance.
Cash equivalencies and cash-like investments are generally secure investments that provide you with quick access to your money. Because of the low risk related to these types of investments, they’ll generally have relatively low rates of returns.
Why pick a cash equivalency? They provide security and access. You might choose to keep money in cash because you need it in the short-term to make a purchase, or if you think there’s too much risk in the market. In the long-term, though, cash equivalencies won’t help very much in growing a portfolio.
Fixed income securities
Fixed income securities are investments based on the straightforward concept of lending and borrowing. When you buy a bond, you are essentially lending your money to the government or a corporate borrower who then pays you a fixed interest rate until eventually paying you back the full “face value” of the bond at the end of the term. Fixed income securities are often less liquid than cash equivalencies.
Why pick a fixed income security? They’re relatively safe and often offer a guarantee and better rates of returns than cash-equivalent investments.
Equities are most often known as stocks or shares and represent part ownership of a business – sometimes to the extent where you are entitled to vote at shareholder meetings. Returns from equities come in two ways: profits from the business called dividends or by selling shares whose value has grown.
Why pick equities? They carry higher risk but they can help significantly in building your savings.
Investment funds are professionally managed (by an investment fund manager) so fees apply but the investment is designed to provide you with a broad selection of opportunities. Your investment is pooled into a fund and then invested into a diverse combination of assets.
Why pick investment funds? They offer built-in diversification, are professionally managed and are easy to both buy and sell.
These unconventional and complex investments include things like options, futures, foreign currencies, hedge funds, gold, and real estate. They usually offer high potential returns, but also higher-than-average risk and are typically held by institutionally accredited or higher net-worth investors.
Why pick alternative investments? Since they don’t necessarily correlate to the stock market, they can be good to diversify a portfolio and mitigate volatility – but are also complex and higher risk.
Private equity is composed of funds and investors that invest directly in private companies. As the companies are not listed on an exchange, these investments can be difficult to sell.
A derivative is a financial instrument (or contract) with a price that is dependent upon, or derived from, one or more underlying assets. Its value is determined by fluctuations in the underlying assets, such as stocks, bonds and commodities currencies.
An investment pool that uses advanced investment strategies that are not generally permitted for traditional investments, such as the use of derivatives.
A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price and date in the future.