When you read about investing and you look at all the different markets you can get into, your head might spin trying to understand them. You might know the names of certain types of securities in investing like stocks and bonds, but what do they do? And when investing, you want to see returns on what you put in and then some, but what is considered a good return on investment? Well, you can start at the beginning and get a feel for what the four main types of investments are.
Debt investments are technically a type of investment nearly everyone has. You are theoretically loaning your money to borrowers and getting interest paid on it. This is how bank savings and CD accounts work, although these usually pay the lowest amount in interest. The main kind of debt investments that pay more interest are bonds, either lower interest long-term government bonds, other higher interest corporate bonds. Some bonds known as high-yield or junk bonds pay a substantial amount of interest provided the borrower doesn’t default. For the most part though, debt investments are pretty steady in earnings.
Equity investments usually involve taking an ownership or holding in a company or certain other assets. Equity investments would primarily be stocks, though related funds such as ETFs, mutual funds, contracts such as options or futures, and other shares in commodities that can be traded. According to the experts at SoFi Invest, “You can buy stocks in the form of individual equities, mutual funds, exchange-traded funds, and more. Your potential rate of return will differ based on the types of stocks you purchase and how risky they are.” Equity investments can offer a little more than debt investments in that you aren’t getting returns simply from interest paid on borrowed money. You’re getting returns when companies do well in sales and profits, or when they grow rapidly. While certainly most stocks will yield returns at a little higher rates than bonds, there is theoretically no limit to how much they could.
Hard assets are investments in physical items that have high value, and that don’t have the drawbacks of debt default or bankruptcy. They do have their own sets of risks though, and their markets can be quite volatile. The most well-known hard asset is real estate, usually investment property real estate which has value not only in the land and buildings, but also from tenants who pay rent. But home flipping and commercial property ownership is also a form of real estate investing. But beyond real estate, items like vintage cars and precious metals can also be invested in.
Insurance products are a bit different in terms of how you get returns from them. But they do have investment value in them with things such as life insurance or annuities. Life insurance has different options from term life to cash value policies, but it does work in case a head of a household passes away, and you can usually find a way to sell it off when you no longer need it. Annuities are a little more like other investments and can include buying bonds or other equities. But they’re insurance products that you buy that offer lifetime income once you reach retirement and start getting your payouts. Annuities have different forms and come with some advantages over other investments. But they also have a lot of drawbacks, so it’s good to weigh them against other investment choices.
Knowing your investment types gives you a starting point for figuring out how you want to invest. From there, you can figure out which investment account type you want to open, and how to manage your risks.