Types Of Investments
Choosing the right type of investment can be a tricky venture. Once you have made the decision to invest your money, research and time can be a crucial part of the process to ensure success. It is important to understand the risks and benefits when weighing your options. Two critical questions to ask yourself is, how much money to invest and where to invest it. Let us look at several investment options.
American Depository Receipt (ADR) Investments
American Depository Receipt or ADR are investments that involve buying stock in companies in other countries. Basically, U.S. banks or investment companies put a certain amount of stock in its depositories. They then set the ratio of U.S. ADRs per the foreign country’s share. If the shares are worth less in the home country, then each ADR will be worth more than one share. The investor will then buy shares of that stock in U.S. dollars. The foreign companies like to use the ADR system because of the exposure they get in the U.S. Since they are traded in U.S. currency, they generally do not have duty fees. However, the depository may charge a small fee for their service. This process, in turn, allows individuals to invest in foreign stock. These investments are a good way for individuals to gain capital from emerging countries.
Annuities are simply fixed payments over a period of time. The investor makes periodic payments to a financial institution or an insurance company. The amount the investor receives is dependent upon how much is paid each period and for how long. This investment is low-risk and appeals to those wanting income. Fixed annuities have a fixed payment and are similar to government bonds and corporate bonds. They are not regulated by the Securities and Exchange Commission. Variable Annuities are regulated by SEC and allow investments in money marketing. Annuities can be deposits into a savings account, monthly insurance payments or mortgage payments. This is a good type of investment for capital appreciation that is fairly low-risk.
Closed-end fund Investments
Closed-end fund Investments sell a fixed number of shares at one time. The shares then go to a secondary market where they are sold or traded the same as stocks. This makes this type of investment very similar to a mutual fund. However, mutual funds prices are determined by net asset value. Closed-end fund share prices are set by supply and demand. These types of investments are specialized by type of industry or region making it unavailable to the entire market. The funds are easy to buy and sell on the market and are a good investment for capital appreciation.
A Collectible Investment is an asset that gains value over time. This is due to the object being a rarity or is in high demand. Collectibles can be anything physical such as stamps, coins, art, or baseball cards. Collectibles can pose high risks. There is no way to tell if a collectible investment will be worth anything in the future and can take years to increase in value. Also, collectibles can be hard to sell at the desired price. However, they are fairly easy to come by as they can be bought just about anywhere. This includes online stores, yard sales, auctions and antiquity stores. Investments of this sort can be a challenging venture.
Common Stock Investments
Common Stock Investments are ownership in a company. This means that you can partake in the company’s profits. The more stock you own in a company, the more dividends you will yield. Also, owning stock gives you the right to vote within the company. Each share equals one vote to elect board members who essentially make decisions concerning the company. These investments give the investors a sense of control when it comes to decision-making within their company and can yield high rewards. However, if a company goes bankrupt, the investment was made in vain since common shareholders are the last to get paid.
Convertible Bond Investments
Convertible Bond Investments can be exchanged into a common stock. The ratio in which the bonds can be converted varies. The indenture can give the investor information on conversion rates. Convertible investments protect the original investment and usually have a good appreciation rate. However, the income is usually not a lot. Also, companies can force bondholders to convert their bonds. The original investment cannot go lower than the market value of the bond. The best time to make this type of investment is when interest rates are high and stocks are low.
Corporate Bonds Investments
Corporate Bonds Investments are bonds issued by a borrower to a lender. Basically, the investor is allowing the company to borrow money. Not only does the company pay back the principal but they also pay a coupon. This is a fee for allowing them to borrow. The payments are paid about every six months until the loan matures. Risks and disadvantages are dependent upon the company. Again, research plays a critical role in these types of investments. Junk bonds are extremely risky because they are purchased from unstable companies that are in financial trouble. Corporate Bond investments are generally a good way to make income if the company is profitable.
Futures Contract Investments
Futures Contract Investments are basically a contract between two parties to buy or sell an asset in the future, at a specific rate that is agreed upon now. Price is determined by supply and demand at the time of the purchase of the contract. This is a high-risk way to invest. It is used to manage price risks. Products are delivered at a designated quantity at a preset price set by the futures market. However, most of these types of investments are canceled before the delivery date. Basically, future contract allows sellers to lock in a price in the future market. This type of investment should only be bought by experienced investors that have a lot of money to work with. Although they are very useful in reducing risk, it is extremely easy to lose your original investment.
Life Insurance as an Investment
Life Insurance is an investment that allows the investor to make periodic payments until his or her death. The beneficiaries then receive a check within a couple of days to cover any lingering bills and funeral costs. Mortgages and bills do not simply go away. These investments ensure that the bills will continue to be paid and gives the investor a piece of mind that their family will be taken care of after they are gone. Insurance companies look at a number of variables to determine insurance premiums. There is little risk because insurance companies are generally stable.
Money Market Investments
Money Market Investments are forms of debt that mature over a short period of time. However, unlike bonds, money markets are sold in large quantities. They allow individuals to participate in money market’s return rates. The interest rate is higher than conventional savings accounts which is an advantage for the investors. However, they are not guaranteed the same federal securities as banks. The best time to make an investment in the money market is when interest rates are high.
Mortgage-Backed Security (MBS) Investments
Mortgage-Backed Security or MBS Investments essentially means that investors lend money to a home-buyer or business. This allows banks to give mortgage loans to customers without assets. MBS’s are backed by government sponsored companies. Therefore, they are considered safe investments. Income rates are dependent upon interest rates. MBS’s are usually sold in sets of $25,000, however some variations allow investors to buy for under $5,000.
Municipal Bonds Investments
Municipal Bonds are investments that are issued by states or counties to fund community improvement constructions. Many municipal bonds are exempt from taxes, which make them popular with investors that have a lot of money. There are not any substantial risks with municipal bonds and are usually purchased for the purpose of income. Keep in mind, investments in bigger cities will yield a more substantial amount of income than small towns.
Mutual fund Investments
Mutual funds are a long-term investment option with strategies varying from fund to fund. These strategies include growth/aggressive, low risk, momentum and more. Basically, large groups of investors pool their money and allow a management company to invest it for them. The mutual fund manager then buy stocks from different markets. . Although there are usually some management fees, the investment is being managed by a professional which takes the leg work out of the equation.
Options are complex and should be used by experienced investors. Basically, they are a privilege sold between two parties, giving the buyer the right to buy or sell a security at a certain price during a specific time frame. There are two types of investors that use options as an investment tool. Speculators buy an option because they believe that stock will decrease or decline in the future. Hedgers use options to reduce the risk and secure current market prices. These investments require a lot of research and knowledge of the market.
Preferred Stock Investments
A Preferred Stock Investment gives the buyer ownership within a company. However, unlike common stock it usually does not give the shareholder the right to vote. Shareholders are guaranteed a fixed dividend. One advantage is that if the company goes under, preferred stockholders are paid right after bondholders. These investments give shareholders a larger dividend than common stockholders but are taxed like income.
Real Estate Investments
When buying real estate as an investment, the single most important thing to look at is location. Investor’s objectives will mainly determine what the property is used for. Those interested in capital appreciation will buy real estate in promising locations and wait for the value to increase. Those wanting income can rent the property out. There are several risk involved when buying real estate. Maintenance expenses, insurance, repairs and taxes can be costly. Also, it is sometimes difficult to sell the property quickly if the market is bad.
Real Estate Investment Trust (REIT) Investments
Real Estate Investment Trusts or REITs sell on major exchanges like stocks, and invest money directly through properties. Investments in REITs usually give investors high- yields and is not tied to other financial assets resulting in protection from inflation. Dividends are usually higher than common stocks but is taxed as income. Therefore, investments that yield high dividends will cause the investor to pay higher taxes.
Treasury / Government Security Investments
Treasuries or government security investments are considered to have little or no risk. These investments are obligations of a national government. They include treasury notes, treasury bills and treasury bonds which are exempt from taxes. These investments are a safe way to invest money especially when the economy is bad.
Unit Investment Trust (UIT) Investments
Unit Investment Trust or UIT is a trust in which a fixed portfolio of securities is purchased and kept until maturity. These investments usually include municipal bonds, government bonds, corporate bonds and common stocks. With a UIT, investors receive dividends on the bonds or stocks within it. The amount of the dividend depends on how much they have invested. Depending on what you are looking for will depend on which type of UIT to buy. For income, bond trust would be the way to go. Capital appreciation seekers would invest in stock trust. These types of investments are a great source of income for retirees since they are fairly predictable.
Investing in Zero Coupon Security / Stripped Bonds
Zero coupon security or stripped bonds is a bond bought at a lower price than its face value. When the bond matures, the face value is then paid to the investors. It does not have coupon, thus the name. These investments can be long term (usually 10-15 years) or short term (less than a year). The bonds can be held until maturity or sold on secondary markets. This allows investors to buy cheap and sell high but is considered income even if it hasn’t reached maturity, requiring the investor to pay taxes on it. The best time to make a zero coupon security investment is when interest rates are high.
Types Of Investments – Conclusion
Regardless of what you are looking for in an investment, it is imperative to fully research each type and ensure that it is the best option to fit your needs. The internet makes it simple to research and access financial markets right from your home.