New investors have a great deal to learn in terms of choosing which investments will provide them with the greatest potential returns at the lowest risks. This is a process that begins with determining which type of investment is best for you. While most people tend to think of stocks, there are more types of investments to learn about.
Start with Stocks
A stock is a share that you buy in a single company, which gives you an interest in the performance of that company. As the company grows, the value of your stock will rise. Alternatively, the stock for a company that performs poorly will lose value. Ideally, you want to buy the stock for a low price and sell it when the stock’s value rises.
Bonds are also Common
Essentially, buying a bond is similar to providing a loan, which is made to the company or government agency offering the bond. The entity will use your money for their purposes and repay the money with interest within a predetermined period of time. While the return is lower with a bond than with a stock, there’s much less risk associated with investing in bonds.
Try Mutual Funds
Investing in a single stock can be especially risky, while bonds don’t provide as great of a return. A third option is a mutual fund, which divides your capital up among various investments. A mutual fund may invest in stocks, bonds, or a combination of investments. They also tend to focus on a certain type of investment. For instance, one mutual fund may invest solely in tech companies, while another may focus investments on hospitality companies. The fund’s value will rise or fall based upon the performance of the individual investments.
Some Investors Have Better Luck with Options
Trading options is different from trading stocks, because you’re not actually buying the stock at all. You’re agreeing to buy or sell a stock once it reaches a specified price within a predetermined period of time. Even if the stock does reach that price, you’re still not obligated to buy or sell. The option is open to you, allowing you to buy the stock for a price lower than its value. If you choose not to buy the stock, you will lose the money you paid for the contract, but that’s the only risk of loss to you.
A diverse portfolio that incorporates several different types of investments provides the best potential for growth. Since the risks vary between investments, you can minimize your risk of loss by dividing your capital among various types of investments. Together with your financial advisor, you should use this information to determine the investment strategy that will best help you reach your goals.