There are many types of investments for beginners, but with these investment ideas, your success is guaranteed. The truth is, investing can be very overwhelming, especially when you are just beginning to look into your options. With the many available options out there, it gets overwhelming. But don’t worry; this guide will aid in helping your grip on the basic things about ten types of investments that are ideal for beginners. Eventually, you will know where to start and have built up some steps that you can take over time to grow money.
1. Savings Accounts
Opening a savings account is arguably one of the most straightforward and most accessible ways to get into investing. It is one of the most simplistic financial instruments out there, and just about any person can make one at a bank or credit union, which, for many people, might be a perfect start to financial management. You are just depositing money into a savings account for the bank to keep safe. The bank, in turn, pays you interest, a percentage of your balance that gradually accumulates.
The rate on savings accounts is typically modest and rarely as high as other investment options, such as stocks or bonds. But whatever savings accounts lack in high returns, they make up for in security and ease of use. The money is insured up to a certain limit through some sort of federal insurance, usually $250,000 in the United States through the FDIC or the NCUA, which means that even if the bank goes out of business or declares bankruptcy, your money will still be safe. That provides extra insurance that the savings account is a near risk-free place to park your money if you are queasy about bumpier investment rides.
Why it’s good for beginners:
Safety: Savings accounts are government-insured, up to a certain amount, ensuring that your money is secure.
Liquidity: At any time, access to your money provides flexibility to have money liquid at any time.
Simplicity: You don’t need to worry about market fluctuation, since your money grows steadily.
Low Returns: The interest rates are very low, meaning with time, your money will not grow much.
2. Certificates of Deposit
Certificates of deposit, or CDs, are special kinds of savings accounts. You give the bank a promise that you’ll put money into the CD, letting it stay there for a fixed period, such as a few months or up to several years. The bank, in return, offers you a higher interest rate than you might have with a regular savings account.
Why it’s good for beginners:
Higher returns than savings accounts: Because you are locking your money up for a specific period of time, the bank pays you a higher rate of interest. Safety: Just like all savings accounts, CDs are covered under government insurance. Predictability: You know exactly how much interest you will earn over the term of the CD. Disadvantages Less liquidity: You cannot access your money without paying a penalty until the CD matures.
Lower returns compared with other investments: While better than a savings account, CDs still have relatively lower returns when compared with more aggressive investments.
3. Bonds
Bonds are loans you give to the government or a company. In return, they agree to pay you back in interest over a stated period of time. There are a number of different types of bonds, including government bonds, such as U.S. Treasury bonds, and corporate bonds.
Why it’s good for beginners:
The risk associated with bonds is generally lower compared to stocks, hence being a safer option for beginners.
Regular income: Bonds usually pay interest on a regular basis, thus offering a regular income stream.
Diversification: Bonds can offset some of the riskier investments, such as stocks, in your portfolio.
Cons:
Lower returns: The return on bonds is normally lower compared to those on stocks.
Interest rate risk: If interest rates increase, the value of your bond may fall if you have to sell it prior to maturity.
4. Stocks
With stocks, when you invest, you are literally buying a minute fraction of a company. That way, if the company does well, then so does the value of your stock, in which case you can sell it for more. Sometimes, some stocks even pay dividends, which are small kickbacks to the shareholder.
Why it’s good for beginners:
High Potential Returns: Stocks do offer some of the highest returns in the longest haul. Ownership: Once you buy stock in a company, you are essentially an owner of a small piece of it. That can be quite cool for many and very rewarding. Easy to Buy and Sell: With online platforms, buying and selling stocks has never been that easy. Disadvantages: Volatility: The prices of stocks may rise or fall in the blink of an eye. This may be quite stressful for those just getting into the game.
Loss risk: There is always that one rogue chance that the firm you invest in will not do well, and you may incur losses.
5. Mutual Funds
Mutual funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. A professional manager makes decisions about which assets to buy or sell.
Why it’s good for beginners:
Diversification: A mutual fund automatically spreads your money across a wide array of investments. This lowers your risk from any single investment. Professional management: You don’t need to study how to pick investments because experts manage the fund. Accessibility: Minimums to invest are fairly low with many mutual funds, making them accessible to almost anyone who wants to start investing. Disadvantages: Fees: Most mutual funds charge a fee for managing them, usually about 1% annually.
Less control: You don’t get to choose the individual investments; the fund manager does that for you.
6. Exchange-traded funds (ETFs)
ETFs are much like mutual funds in that they pool money from many investors to buy a diversified portfolio. The key difference is that ETFs actually trade on stock exchanges, just like individual stocks.
Why it’s good for beginners:
Diversification: As with mutual funds, ETFs provide instant diversification since all your money is invested in a single fund.
Some of the reasons for investing in ETFs include: Lower cost: Most ETFs are less expensive when compared to mutual funds, since they don’t have investment managers that actively manage a portfolio. Flexibility: Since most ETFs are traded on an exchange like stocks, you can purchase and sell at any time during the day.
Disadvantages:
Market risk: Because ETFs are traded on the stock exchange, their value will fall and rise with the market conditions. Complexity: Many of the newer ETFs follow complicated indexes that may be difficult for beginners to comprehend.
7. Real Estate
Investment in real estate involves buying property in order to derive rental income from it, or to sell the property at profit. While this type of investment may require a larger initial investment, real estate has the potential to be highly lucrative for beginning investors who are prepared to take greater responsibility.
Why it’s good for beginners:
Tangible asset: Real estate is a tangible thing you can touch, which is less volatile than a stock or bond in some people’s eyes.
Income Generation: You can generate regular income by renting out the property. You can also appreciate the value of the property over time, which you can then sell for a decent profit. Disadvantages High entry price: Most real estate investments need a huge amount at the beginning. Maintenance and management: Property ownership involves maintenance, managing tenants, and even paying property taxes. Market volatility: Real estate markets are very unpredictable. It is very possible that property values may fall.
8. Robo-Advisors
Robo-advisors are online platforms that use algorithms to manage your investment. You answer a few questions about your financial goals and risk tolerance, and the robo-advisor creates a personalized investment plan for you.
Why it’s good for beginners:
Low cost: Generally, robo-advisors charge lower fees than traditional financial advisors.
Automation: It automatically manages your investments. That is, it is pretty easy and requires very little effort to get started.
Personalization: Your investment plan is personalized to your goals and risk tolerance.
Cons:
Limited human interaction: If you enjoy interacting with an actual person, then robo-advisors are not for you.
Less control: This investment decision is done by the algorithm, hence less control on where your money must be invested.
9. Index Funds
Index funds are a form of mutual fund or ETF devised to mimic the movements of certain market indexes, like the S&P 500. It gives broad exposure to the market with minimal expenses due to its very simple approach to investment.
Why it’s good for beginners:
Low fees: Most index funds are cheaper than other actively managed funds.
Broad diversification: Because it tracks a market index, you can invest in a myriad of companies.
Consistency: Generally speaking, index funds have a fine long-term performance and therefore are quite appropriate to the starters.
Disadvantages:
No chance above the market: Because index funds are only designed to track the market, your investment will not outperform the market performance.
Market risk: Being an equity-based investment, index funds also share the risk of losing some or even all of the principal value in case of any market decline.
10. Retirement Accounts (401(k) and IRAs)
Tax-advantaged investment accounts, like 401(k)s and IRAs, are created to help one save for retirement. Stocks, bonds, and mutual funds are some of the different kinds of investments you can make within a retirement account.
Why it’s great for beginners:
Tax benefits: Many retirement accounts allow you to deduct money from your income and contribute that money to the retirement account on a tax-deferred basis. In other words, you won’t be paying taxes when withdrawing cash from an individual retirement account.
Employer matching: Most employers will at least match the amount that you put into your 401(k), and this is just free money for retirement.
Long-term growth: Retirement accounts basically force you into long-term investing, which is terribly important if you actually want to build some wealth over time.
Cons:
Early withdrawal penalties: If you draw it out early, before retirement age, you could get hit with penalties and taxes.
Limited access: Until you attain retirement age, accessing money in these kinds of accounts usually comes with penalties, which might be one drawback if you need liquidity.
Conclusion
Conversely, investing does not necessarily have to be complicated. You can start building a portfolio that suits your financial goals and risk tolerance by beginning with the above-mentioned ten kinds of investments.
Whether you seek safety, income, or growth, there’s an investment option out there that’s right for you. Keep in mind that the key to successful investing involves starting early, keeping yourself well-informed, and being patient. In time, your investments will grow and help you reach your goals.