Types of Investments & Their Rates of Return
In this section, you’ll…
- Learn about the three basic types of investment choices
- Understand their respective benefits and drawbacks
- Learn why stocks are so attractive to investors
When you begin investing, one of the most important things you need to decide is where to invest your money. Understanding the types of investments available to you and their respective rates of return will aid you in making this decision.
From the outside looking in, there are a seemingly endless number of investment choices. We’re going to begin by looking at the big picture of the world of investments…and the big picture is amazingly simple.
In the world of investing, you have just three basic types of investments to choose from:
1. Ownership investments
2. Lending-Type Investments
3. Cash and Cash-like investments
Your Basic Investment Choices
The first type of investments is ownership investments. With ownership-type investments you’re buying a piece of something – a small business, a house, or the publicly traded shares (also referred to as equity or stock) of a company.
The second type of investments is lending-type investments. In this category are bonds, treasury bills, and certificates of deposit. With lending investments you only agree to lend your money. This is often for a specified period and for a predetermined price, namely the interest you will receive. Sometimes you lend it to a government, and sometimes a financial institution.
The third type of investments is cash or cash-like investments. This refers to plain old money, as well as investments that can quickly and easily be turned into cash. This includes money in your savings and checking accounts, as well as money market mutual funds.
Each of these investment types has different characteristics to consider, including:
- The range of returns you can expect
- The volatility or level of risk
- The likelihood you’ll be at least able to get your original investment back at any point
- How your gains are taxed
Lending investments are generally less volatile than ownership-type investments, due to their guarantee of securing your original investment.