Where to invest money depends on an individual's risk tolerance and whether the money is being invested for the long or short term. Some people enjoy the thrill of researching specific companies and buying stocks, while others prefer to let a fund manager do the stock selection. Most investments involve nothing more than a paper trail, but a more hands-on approach is possible through real estate investment. A wise investor diversifies money into different types of investments.
Equities, or equity securities, are shares of stock in a company. Individuals can purchase shares of a particular company, or they can purchase a portfolio of stocks as part of a mutual fund or exchange-traded fund (ETF). Investors hope stocks grow in value and that they pay their investors dividends, which are payments of the company's profits paid to its shareholders. Equities are considered to be among the riskiest types of investment, but also a type with the greatest potential for big profits.
When you invest in a bond, you are lending money to a company or to the government, and you are paid back with interest rates. They are considered fixed income securities because the amount of interest has already been determined. Corporate bonds present more risk but may pay higher interest. Government bonds are considered safer, but pay lower rates. Some government bonds, known as muni or municipal bonds, are exempt from some or all income taxes.
If you own your own home, you are already real estate investor. It is also possible to invest in income properties, either residential or commercial. Owners of income properties have to find tenants and manage their properties, or hire someone to do the work for them, so it is not an investment you can control without exerting some effort. A less laborious way to invest in real estate is to purchase shares in a Real Estate Investment Trust (REIT), which is similar to a mutual fund. REIT investors purchase shares and receive annual profits, if any, but their principal value can go up or down.
Commodities are physical products, like corn, sugar, metals and natural resources. You don't, however, have to stockpile them in your home. They are traded on exchanges, similar to stocks. They're considered high-risk investments because they are exchanged based on futures contracts, so you're betting on costs going up. It is possible to invest in commodities through mutual funds or ETFs.
Many young investors don't remember a different economic time when cash equivalents, like money market funds and certificates of deposit (CDs), paid healthy interest rates. Interest rates paid to investors are based on the rates that are charged to borrowers. In 2010, the U.S. prime rate for lending was 3.25 percent. In 1970 it was 8 percent, and in 1980 it was a now astonishing 20 percent, and it's been everywhere in between. Cash equivalents remain the safest place to park money, and even when interest rates are low, it is still a good way to keep money that might be needed in the short term.
- investment image by Kit Wai Chan from Fotolia.com