What are the different types of investing?
If you’re thinking of investing your money, then you might be overwhelmed by all the
different types of investments you could get involved in. We’ve done our best to simplify
the industry and explain the different types of investing, one by one.
A stock, also known as equity, is marketable security which can be bought or sold to result in a profit. Investors purchase stocks in companies if they think that they will go up in value, as the stocks can then be sold for a profit by the investors. In particular, a stock is an investment in a public company. These investments have a substantial risk in the short term as the stock market is volatile.
Common stocks and preferred stocks are the two main types. These stocks are then subdivided by company size, industry, and location.
Common stock: If you are a common stock shareholder then you own a share in the company’s properties as well as a right to vote. They may also earn dividends (portion paid to them regularly). However, these dividends are not guaranteed. This stock can be beneficial for higher long-term returns.
Preferred stock: This stock is compared to bonds frequently. The main difference between these two stocks is that preferred stock gives no voting rights to shareholders while common stock does. They also have preference over common shareholders, because they have priority over a company’s income, so are paid a fixed dividend before common shareholders. This is true in cases of liquidation and bankruptcy, which is why preferred stock is most commonly used. This stock is best for investors looking for a fast return on investment.
This type of investment is also known as a fixed-income security. These are used to invest large sums of money and pay interest regularly to help generate a steady stream of income from savings.
Bonds tend to act like life insurance policies that last for a fixed term or have no set investment time. Like any investment, there is no guarantee that you will make more or less money than you invested. Bonds vary from equities because they spread the risk across a period of time and can provide a defined income.
There are a multitude of different types of bonds: Treasury bonds, government bonds, corporate bonds, high-yield bonds, foreign bonds, mortgage-back bonds, and municipal bonds.
An index fund is a low-cost fund that tracks the financial market index at any given time. These types of funds are usually used to invest in all the components of the portfolio in the index that they are tracking.
People typically invest in index funds because it allows them to have high levels of performance by matching the financial market. This eradicates a large amount of the risk because the indexes include lots of different stocks to ensure a high level of diversification. It also saves on time researching stocks and can be used for non-experts as it uses a fund portfolio manager to invest for you.
Otherwise referred to as a portfolio, this type of investment allows you to pool your money together with other investors to purchase different bonds and stocks. The NAV (Net Asset Value) of these funds is calculated by dividing the total value of securities in the portfolio by the number of funds outstanding.
Mutual funds are ideal for small investors looking to make money because you don’t need large sums, to begin with. It also allows investors with retirement accounts or certain types of brokerages to be exempt from a minimum amount of money, however, this is not guaranteed if you choose a mutual fund.
ETFs or exchange-traded funds are an easy way to invest in bonds or shares by tracking a specific market. They are ideal for investing in the long-term at low costs. In this way, they are similar to index funds because they rely on monitoring the performance of a particular area to incur a profit.
However, ETFs differ from index funds in terms of fees and the way in which they are bought and sold. This type of fund is traded on the stock market, a place where individual and institutional investors come together to buy and sell shares publicly. The stock market operates 24 hours of the day and therefore ETFs can be bought or sold whenever.
ETFs normally have a lower going fee attached to them. This fee goes to the stockbroker that was used on the stock market. This lower rate appeals to people trading as it is less output of their own money.
Options are used to value securities and create option contracts to give buyers the opportunity to buy or sell these underlying securities. This is done on the options market. For the majority of people, investing in option contracts is not wise because it is easy to lose 100% of your investment in a bid that was proposed to you.
Often in an options contract, there is a time period assigned to an investment and this could also contribute to losses.
The main benefit of options is that if you manage to choose a stock that does increase in value then you will have an increased profit because you will have bought the stock for less than the going rate.
How to choose between the different types of investing
Set your goal. First and foremost, you must decide what you would like to gain from this investment and which area you would like to put your money into. Then once you’ve chosen an investment type you’re happy with, follow the steps below.
- Determine the length of the investment
Consider how long the amount of money you have will last and create long-term or short term time frames.
- Review the risk factors
Decide whether you want to have a low risk and low yield or high risk and high yield.
- Choose a brokerage
Whatever type of investment you use you will need to pick one of these.
- Check the fees
Make sure that you are not choosing a method that results in you paying a large amount of fees, especially if you start with a small budget.
- Come up with an investment plan
Sit down and begin your method!
- Make sure it involves you diversifying
Before you invest, make sure you spread out your money to lower the risk of losing all of it. For example, if you concentrate your investment on one or two particular stocks or bonds and they plummet, you will have no safety net to secure at least some of your money.
Stick to your plan and seek financial advice along the way.
- Keep up to date
Make sure you check your type of investment periodically and review what the best thing is to do with your money in the current climate.
If you’d like more information on how you can invest in film and more details about potential tax reliefs and returns, have a look at our investment calculator and contact us if you want to know more.
The information contained on this website should not be taken as financial advice or as a personal recommendation by Films4U. Before investing you should always seek appropriate legal and financial advice from an authorised person specialising in investments of this kind.