Common types of investments to know about

Stocks

Stocks are shares of a company. They come with all the slings and arrows of fortune that any company goes through. That means your investment is subject to both growth and risk. If you buy common stocks, you become a voting and dividend-receiving shareholder; preferred stocks, meanwhile, put you further up in line to get a piece of the company if it liquidates.

You can manage your investment in stocks yourself, or entrust them to a manager.

Exchange-traded funds (ETFs)

Like a mutual fund, but they can be traded anytime as opposed to only at the end of a trading session. ETFs have more liquidity than mutual funds, and less risk, as well as lower fees. They’re flexible and can be used to make money short- or long-term.

Retirement plans

Some companies set up employer-sponsored retirement plans for their employees, and often both the employer and the employee contribute to it.

• A 401(k) plan (in the US) allows you to put a part of your pre-tax income into a retirement account. Then you invest this money in different kinds of assets, such as stocks, bonds, and mutual funds.

• A 403(b) plan is similar to a 401(k), but is usually offered by nonprofits and public schools.

• A retiree can get a pension plan with a fixed monthly income. The amount of money depends on the previous income and time in employment.

Individual retirement accounts (IRAs) are savings accounts designed specifically for retirement. Employees contribute and invest in them independently, outside of employer-sponsored plans. There are:

• traditional IRAs, which allow you to invest your pre-tax income, lowering your annual taxable income, and grow your investments tax-deferred.

• Roth IRAs, in which the contributions are made with after-tax income, and there is no immediate tax deduction. Earnings also grow tax-free.

• SEP IRAs for self-employed workers.

Certificates of deposit (CDs)

CDs have almost no liquidity. You put money in, and as long as you keep it in until the expiration date, you receive interest on it, and at a pretty high rate. If you withdraw early, you pay a penalty.

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Options

These are securities that give investors the right (but not the obligation) to buy or sell an asset at a predetermined price within a specified time period. Note that an investor does not directly own the assets themselves.

A stock, index, or commodity serves as the underlying asset for an option contract. The investor should buy or sell the asset by the fixed expiration date, or the contract becomes invalid. The option holder can exercise the option (buy or sell the asset) at a fixed strike price. The cost of purchasing the option is called the premium.

There are two main types of options:

• If you think the asset you’re buying into will become more valuable, you get a call option.

• If you think an asset you own is going to become less valuable, you sell it now and buy it back later. This is called a put option.

When dealing with options, consider the risks that come with them:

• They are valid only in the exact timeframe.

• Leverage can multiply the gains, but it can also multiply the losses.

• Options are sensitive to changes in the underlying asset’s price, and the market can be volatile.

Derivatives

Derivatives are contracts whose price depends on an underlying asset, index, or security. Investors often trade such contracts on exchanges, or over the counter (OTC). For example, forward and futures contracts are derivatives.

They are commonly used for leverage, as they allow investors to secure larger positions with a smaller amount of money.

Annuities

These are basically savings accounts with a high interest rate. You put money in, and either receive fixed interest on it (immediate), or wait for it to grow and then get the money back in a structured way - all at once, yearly, quarterly, monthly, or some other option (deferred). Some annuities are variable, which means the amount of interest you receive depends on the performance of the fund’s underlying assets. Annuities are often a prime choice for retirees. They have very little liquidity, however, and can be negatively impacted by inflation.

Hybrid investments

Hybrid investments combine features of both debt (fixed income) and equity (stocks) to offer investors a middle ground between income stability and potential for growth.

The main types of hybrid investments include:

• convertible bonds.

• convertible preference shares.

• pay-in-kind toggle notes.

Hybrid investments offer diversification — there is a mix of asset types, which can reduce risks. Many hybrid investments offer both regular income (from dividends or interest) and potential for capital appreciation. Hybrid investments allow investors to choose products with different levels of stock and bond allocations considering their individual goals.

Although there are some factors you should consider.

• While hybrids are generally safer than pure stock investments, they often offer lower returns because of their fixed-income components.

• Hybrids are often sensitive to interest rate changes.

• Fixed-income components and dividend payments in hybrids tend to limit the upside potential that a pure equity investment might offer.

• Some hybrid investments can be complex and demand higher fees, which can impact returns over time.

• Market and credit risks can affect hybrids, especially those tied to corporate bonds.

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Commodities

Commodities refer to raw materials that can be bought, sold, or traded: resources such as metals, energy sources, and agricultural products.

Commodities are categorized into two main types:

1. hard: natural resources extracted from the earth, like metals and energy sources (gold, silver, crude oil, natural gas, copper).

2. soft: agricultural products and livestock (wheat, corn, coffee, sugar, soybeans, cattle).

Why invest in commodities?

• They often increase in value when inflation rises, which makes them a great hedging tool. For example, essential goods with high demand like oil, gold, and food prices tend to increase with inflation.

• Commodities are usually independent of traditional assets like stocks and bonds, which makes them effective for diversification.

• Commodity prices can be highly volatile, offering opportunities for great profits. Supply constraints, geopolitical tensions, and demand surges can cause price increases.

As always, however, volatility can play a negative role: the variety of factors affecting commodity prices can quickly and unexpectedly cause the prices to drop. For physical commodity investments, storage, insurance, and transportation can add costs, reducing profitability. Another disadvantage is that unlike stocks and bonds, most commodities do not generate income.

Comparative table by type of investment

How to purchase different investment types