Types of Investments 101

A good number of people have heard of Real Estate, Stocks, and Bonds, but there are other ways you can invest your money. This is a guide of the main types of investments and what they are. Of course, new investments are popping up all the time but these are the basics.

There are lots of terms associated with each investment, too. Some of these you need to know. Most importantly, Robert Kiyosaki taught me that assets put money into your pocket and liabilities take money out (This is why your home is not an asset). We’ve listed some of the terms used with each investment. To get you started, we decided to also list a few general investing terms. Let’s get started.

General Investing Terms

Asset: Assets put money into your pocket. They are the investment you control that makes you money. You don’t always have to own them, only control them. They are usually things like stocks, bonds, commodities, and real estate. However, they can include other things.

Asset Class: Class relates to the characteristics of an asset and how they are grouped. The class can mean stocks, bonds, or commodities. It can also refer to characteristics within an asset group like single-family homes, land, or commercial real estate.

Holding: A holding is an asset you have in your portfolio. Called “holding” because you are holding onto and not selling it at the moment. Most holdings, like stocks, are waiting for the value to increase. Some holdings may be collecting dividends (interest payments) or some type of income (like rent). Properties that are bought for the purpose of keeping for a minimum of 2 years and more are often called Holds.

Liabilities: Where assets put money into your pocket, Liabilities take money out of your pocket. In regards to assets, the liability may be a mortgage you have on a rental property or money owed to your investors. In a household, any money going out (mortgage, car payments, credit cards) is a liability.

Portfolio: A portfolio refers to a person’s investment assets, as a group. Diversifying your portfolio simply means to invest in a variety of types of assets.

ROI: ROI means the return on your investment or the money you made in proportion to the money that you invested.

The Main Types of Investments

Annuity: Annuities are a long-term investment you purchase from an insurance company. The company then promises to make payments periodically. Sometimes the payments start immediately (immediate annuity) and sometimes the payments start in the future (deferred annuity). Most people use these investments for retirement purposes as the deferred annuity payments can start at 65. They provide income for retirement and to also protect you from the risk of outliving your income.

The Good: Again, like CDs, these are as safe as the Insurance Company you have them in. They are considered low risk.

The Bad: Not liquid at all. Often, if you withdraw before the age of 60, you’ll receive a 10% tax penalties. Any type of early withdrawal not only has penalties, but the earnings are taxable as ordinary income.

Bonds: A bond is a type of loan. Cities use bonds all the time. When a company or government body, like a city, needs money, they create a loan amount and offer it up to investors in the form of Bonds or pieces of that loan with a promised amount of return (usually in the form of interest payments) over a set amount of time. The Coupon Rate is the interest rate, which can be fixed or variable. The Maturity Date is the set period of time when the bond is expected to be paid. The Issuer is the business or government that needed the loan. They are expected to pay back Par or the original face value of the loan.

The Good: Bonds are considered a safe and stable investment because there aren’t a lot of variables. Usually, they provide a steady flow of income, as long as the city or company pays them back (Both have been known to go broke though). As a result of their stability, the long-term returns are most likely to be less when compared to stocks. However, some bonds have outperformed average stocks’ rate of return.

The Bad: Bonds can be risky, as risky as the issuer and the economy driving the project. So their payments and your original investments are at risk.

Certificate of Deposit (CDs): A CD is a promissory note that is issued by a bank in exchange for your money for a set period of time. The longer the time, the better the rate of return on your investment. CDs were amazing deals in the 80’s when I was growing up because the interest rates were incredible. You could lock in a return rate of 10-12%. Now, you’re lucky to get 2%. When you get a CD, you give the bank a certain amount of money, say $10,000 for 5 years, and you can’t touch that money without a penalty for the agreed-upon period of time. In return, when you cash out your CD, you get your investment back plus the set amount of interest.

The Good: It is usually a safe and nearly risk-free investment, as most American Banks have been around for quite some time. The more volatile the bank, the more volatile your money.

The Bad: Hello? 2% Return on $10,000? That is a crazy low amount of interest for a long period of time. Why even have your money in a bank if you aren’t going to earn any interest on it?  Yes, they are liquid but while you can cash out early, you will pay penalties for early withdrawal.

Mutual Funds: Like the name implies, mutual funds are pooled investments created by a group of investors. The pooled money or fund is managed by an investment manager. The manager invests the fund’s money in stocks, bonds or other investment vehicles as declared in the fund’s prospectus, it’s plan. Mutual funds’ transactions, orders to buy or sell shares, can be carried out after the market closes, unlike yours and mine.

The Good: Mutual funds give small investors the chance to instantly buy a diversified holding portfolio.

The Bad: Your money can disappear overnight with one bad investment. Gains are usually smaller because the wins are watered down by the losses. The worst thing about this investment is you are not in control.

Real Estate: By far, America’s favorite investment is Real Estate or RE. RE is a piece of property that may or may not be improved upon. An improvement is a building or house on a piece of property. There are complicated pieces of RE where you can buy a home on property you lease but that is rare. Investing in RE usually involves buying a home, multi-unit residence, commercial property like a strip mall, or piece of land. However, you don’t always have to own the property, just control it. When you control RE, you can own, manage, rent out or sell it in order to make a profit. Obviously, RE can’t be sold as quickly as other assets, this is call liquidity. RE is not very liquid or easily sold. It can sometimes, but not always, involve money down. But there is massive potential for profit-making in RE when you buy low and sell high.

The Good: In a steady market, you can project earnings easily and accurately. RE can be leveraged with OPM (other people’s money) by getting a mortgage or obtaining investors. Not many assets can be acquired through loans like RE. Most assets require cash. Money can sometimes be pulled out of your RE assets, in the form of loans. If a property’s value falls, you can just hold onto it longer. As long as the property is cash flow positive, the value doesn’t matter unless you are selling it.

The Bad: 8 million people lost homes that were over-leveraged when the last RE crash occurred. This is because they overleveraged and borrowed more than they could pay. You make your money in RE when you BUY the property, not when you SELL. This means you need to have multiple exit strategies before you buy and make certain that you run through every possible worst-case scenario. The same experts that warned us of the last crash are warning us of another one coming soon. Make sure you have a fool-proof exit strategy in place or you can lose everything.

Stocks: When companies want to grow, they sell shares of stocks to raise the money they need. When you invest in stocks, you are buying a share of ownership in a company or business and you become a shareholder. Stocks are paper certificates and there are two types; Common Stock and Preferred Stock. Common Stock gives you a percentage of ownership with the right to vote on issues affecting the company. Some Common Stockholders receive dividends, the money given to a company’s owners (shareholders) from the profits made each quarter. Preferred Stockholders are entitled to dividends after a specified period of time in a predetermined amount. However, they typically do not have voting rights.

The Good: You can make or lose a lot of money in the stock market. However, studies show that if people don’t panic when a stock goes down, the market usually recovers in time. Like the housing market, if you can hold on and not sell until it recovers, you should be fine. The worst thing that can happen, as long as you aren’t playing with Puts and Calls, is you’ll lose all your stock if a company goes bankrupt.

The Bad: A crystal ball can’t tell you how a company is going to do or what surprises lie ahead. ROI is a risk that you have to take. You measure that risk by doing your due diligence (investigating everything you possibly can about the investment ahead of time). What might affect your stocks are things like the economy, the political scene, the performance of the company itself, and other stock market factors.

Now go and grow! 

 

 

Michelle R Russell

© The Prosperity Process, LLC  

for BNB-Boss