When investing, stocks get the lion’s share of the attention. Investing in individual stocks is one way to grow your wealth, but there are plenty of other investment assets to explore and understand.
Depending on your financial goals, timeline and risk tolerance, you should invest in a well-diversified combination of the following nine assets to build your portfolio.
Stocks are the basic building blocks of investing. When you buy stocks—frequently referred to as equities—you receive shares of ownership in a public company.
As the company grows and earns greater profits, the value of your shares of stock should appreciate. You may even be entitled to dividend payments as a shareholder.
Here are four ways to think about the different stocks available:
- Growth stocks. These are companies that are growing their revenues, cash flow and earnings at rates that are much greater than their peers.
- Value stocks. Very often, the share prices of perfectly solid and healthy public companies drop well below where they should be, due to larger market developments outside of the company’s control. When a stock’s price is low like this but its business fundamentals are good, it’s called a value stock.
- Dividend stocks. Companies that pay dependable dividends are viewed as providing shareholder a steady stream of income.
- Blue-chip stocks. These are the stocks of large, established public companies that have become household names, like Apple, Disney and Microsoft. Blue-chip stocks have a proven track record of dependable performance and a history of regular dividend payments.
To buy stocks, you need an account. You can opt for a tax-advantaged account such as an individual retirement account (IRA), or a taxable brokerage account.
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Bonds are fixed-income securities that corporations and governments issue to raise money to fund projects. When you buy a bond, you lend money to the issuer. In exchange, the bond issuer pays you interest and, once the bond reaches its maturity date, the issuer returns your original investment.
Bonds are less risky than stocks, but they also offer lower returns. If interest rates rise, bonds become less valuable because new bonds offer higher rates.
To buy bonds, you can purchase them directly from an issuer, or you can buy them through a brokerage account.
When financial professionals refer to cash as an investment, they’re not talking about literal bills and coins. Instead, cash investments—commonly called cash equivalents—are short-term investments that provide stability to your investment portfolio.
Common examples of cash investments include the following:
- Money market funds. These mutual funds invest in government bonds, tax-exempt municipal bonds and corporate or bank debt securities.
- Treasury bills. Known as T-bills, these are short-term investments issued by the U.S. government with maturities ranging from four to 52 weeks.
- Certificates of deposits (CDs). CDs are deposit accounts that usually offer higher rates than savings accounts. CDs have terms ranging from a few months to several years, and the money cannot be touched before the end of the CD term without incurring significant penalties.
Cash equivalents are useful if you have short-term financial goals and will need the money within a few months. They are also appealing to retired investors that can’t afford to take on much risk.
You can invest in cash equivalents through banks or TreasuryDirect.gov. Some brokerage firms also offer brokered CD accounts.
4. Mutual Funds
A mutual fund pools money from investors to invest in groups of stocks, bonds and other securities. Its combined holdings, known as a portfolio, are managed by experienced financial professionals.
There are several types of mutual funds:
- Stock mutual funds. A stock mutual fund is a collection of stocks chosen by a professional money manager. The fund is typically designed to track a market index, such as the S&P 500.
- Bond mutual funds. Bond mutual funds invest solely in bonds rather than stocks. These funds provide stability to an investment portfolio and typically have lower returns than stock mutual funds.
- Balanced funds. These mutual funds own a mix of both stocks and bonds, typically with a fixed asset allocation such as 60% stocks and 40% bonds.
Compared with individual stocks, mutual funds are lower-risk investment assets. By investing in a mutual fund, you diversify your portfolio by owning many stocks or other securities at once.
There are thousands of mutual funds, but we’ve identified the best mutual funds to help you get started. If you’re ready to invest your money, you can buy mutual funds through your brokerage account.
5. Index Funds
Index funds are a form of mutual fund that’s passively managed and best suited for long-term investors.
While many mutual funds are actively managed by professionals who try to beat the performance of a market benchmark, index funds aim to replicate the performance of market indexes, such as the Dow Jones Industrial Average (DJIA) or the S&P 500.
Like standard mutual funds, index funds provide diversification since you invest in many companies or industries at one time. If one company within the fund performs poorly, the other companies within the portfolio may offset the losses.
You can buy index funds through your employer-sponsored retirement plan or your brokerage account.
6. Exchange Traded Funds (ETFs)
Like mutual funds, ETFs pool money from investors to buy baskets of securities, including stocks and bonds. ETFs can track market indices or they can be focused on particular sectors, such as foreign energy companies or domestic technology securities.
ETFs tend to have lower investment minimums than mutual funds, so they’re a good choice for new investors without a lot of cash on hand. Like stocks, they are bought and sold on market exchanges throughout the day.
You can buy ETFs through brokerage accounts and employer-sponsored retirement plans. If you are new to investing, our guide to the best ETFs could be a good starting point for you.
An annuity is a contract between an individual and an insurance company. When you purchase an annuity, you pay the insurance company in installments or a lump sum.
In exchange, the insurance company agrees to make periodic payments to you for a set period. Many people typically use annuities to get a steady stream of income in retirement.
There are three main types of annuities:
- Fixed annuities. A fixed annuity pays a guaranteed interest rate for a preset period. Once the accumulation phase is complete, you will receive payments for a set period, such as 10 to 20 years.
- Variable annuities. A variable annuity does not have a guaranteed interest rate. The interest rate and payments will fluctuate based on the performance of the underlying investments, such as stocks and bonds.
- Index annuities. With an index annuity, interest and payments are determined by the performance of a stock market index, such as the Nasdaq Composite.
You can invest in annuities by working with an insurance company, bank or investment broker.
Derivatives are financial instruments whose values are based on an underlying asset. The three most common types of derivatives are futures, options and swaps.
- Futures contracts. Futures contracts are agreements to buy or sell an asset at a future date and price. For example, you may agree to buy gold at $1,000 per ounce six months from now. If the price of gold goes up to $1,200 per ounce, you will profit from the difference. However, if the price falls to $800 per ounce, you will incur a loss.
- Options contracts. These contracts are much like futures, but buyers have the right—but not the obligation—to buy or sell an asset at a future date and price. Call options give you the right to buy an asset, while put options give you the right to sell an asset.
- Swaps. These are agreements between two parties to exchange cash flows in the future. For example, one party may agree to pay another party a fixed interest rate in exchange for a variable interest rate.
Derivatives can be used to speculate on future price movements or to hedge against losses. However, they tend to be complex, risky investment assets, so they may not be a good idea for the average retail investor.
As an investment asset, cryptocurrency has received a lot of buzz. The most well-known cryptocurrency is Bitcoin (BTC), but there are many others. Top cryptocurrencies include Ethereum (ETH) and XRP (XRP)
Investing in cryptocurrencies is risky, as their prices can be highly volatile. These assets are also not regulated like other investment assets, like stocks and bonds. But that may change as governments take a wider interest in applying more regulations to the sector.