When most people think of investing, they generally think of traditional investments—namely stocks, bonds, and cash. Whether it’s the index fund in your 401(k) or the cash in your savings account, these traditional investments are common for most individual investors.
But thats only part of the picture. Theres another category of investing beyond traditional investments, called alternative investments.
Are you confused about where to put your money? Don’t worry, you’re not alone! As someone who’s spent years learning the investment ropes (and made plenty of mistakes along the way) I want to share what I’ve discovered about the main types of investments available to us regular folks.
The investment world can seem overwhelming with its fancy jargon and countless options, But I’m gonna break it down into the 7 fundamental types of investments that form the backbone of most portfolios Understanding these basics will help you make smarter decisions with your hard-earned cash!
The 7 Main Types of Investments
1. Stocks
Stocks are probably the first thing that comes to mind when you think about investing. When you buy stocks, you’re actually purchasing a small ownership stake in a company. You become a shareholder!
How stocks work
- You buy shares of publicly traded companies (like Apple, Amazon, or Microsoft)
- The value of your investment rises or falls based on the company’s performance
- You can make money in two ways: when share prices increase or through dividends (portions of company profits paid to shareholders)
Stocks generally offer the highest potential returns over the long term, but they also come with significant risks. The stock market can be quite volatile, with prices swinging dramatically based on economic conditions, company performance, and even investor sentiment.
My personal experience: I started investing in stocks during the 2020 market downturn and caught some amazing deals on tech companies. But I’ve also held stocks that dropped 30% in a single day after disappointing earnings reports. It’s definitely a rollercoaster!
2. Bonds
Bonds are essentially loans you make to an organization. When you buy a bond, you’re lending money to either a company or a government entity for a specific period of time.
How bonds work:
- You lend money to an organization for a fixed period
- They promise to pay you back the full amount (principal) at maturity
- They also pay you interest during the loan period
- Types include corporate bonds, municipal bonds, and government bonds (like US Treasury bonds)
Bonds are generally less risky than stocks, but they also typically offer lower returns. They’re considered fixed-income investments because they provide steady, predictable income through interest payments.
I personally keep about 30% of my portfolio in bonds to balance out the volatility of my stock investments. It helps me sleep better at night!
3. Mutual Funds
Mutual funds are investment vehicles that pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
How mutual funds work:
- Professional fund managers handle investment decisions
- You buy shares in the fund instead of individual securities
- Your money is combined with other investors’ money
- This allows for instant diversification, even with small investment amounts
- Can be actively managed (trying to beat the market) or passively managed (tracking an index)
Mutual funds are great for beginners because they provide instant diversification and professional management. However, they do come with fees, which can eat into your returns over time.
4. Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds in that they hold a collection of securities, but they trade like individual stocks throughout the day.
How ETFs work:
- Trade on exchanges just like stocks
- Often track specific indexes (like the S&P 500)
- Generally have lower fees than mutual funds
- Provide diversification like mutual funds
- Offer more flexibility in trading
ETFs have become super popular in recent years because they combine the diversification benefits of mutual funds with the trading flexibility of stocks. Plus, they typically have lower expense ratios than mutual funds.
When I first started investing, I found ETFs to be the easiest way to get exposure to the broad market. I still hold several index ETFs as the core of my portfolio.
5. Real Estate
Real estate investments involve purchasing property or investing in real estate-focused securities.
How real estate investments work:
- Direct ownership: Buying physical property (homes, land, commercial buildings)
- REITs (Real Estate Investment Trusts): Companies that own, operate, or finance income-producing real estate
- Real estate mutual funds or ETFs: Funds that invest in real estate companies or REITs
Real estate can provide both income (through rent or dividends) and potential appreciation in property value. It also offers diversification benefits since real estate often performs differently than stocks and bonds.
I’ve invested in a couple of REITs and they’ve been a nice source of dividend income for my portfolio. Much easier than being a landlord!
6. Certificates of Deposit (CDs)
CDs are time deposits offered by banks that pay a fixed interest rate for a specific time period.
How CDs work:
- Deposit money with a bank for a fixed time period (3 months to 5+ years)
- Bank pays you a guaranteed interest rate
- Funds are locked until maturity (early withdrawal penalties apply)
- FDIC-insured up to $250,000
CDs are very low-risk investments, making them suitable for short-term savings goals or as part of a conservative portfolio. However, their returns are typically lower than other investments, and they may not keep pace with inflation.
I use CDs as part of my emergency fund strategy – they offer better returns than regular savings accounts while still keeping my money safe and accessible when needed.
7. Alternative Investments
Alternative investments include anything that falls outside the traditional investment categories above.
Common types of alternative investments:
- Commodities (gold, silver, oil, agricultural products)
- Cryptocurrencies (Bitcoin, Ethereum, etc.)
- Private equity
- Venture capital
- Hedge funds
- Collectibles (art, wine, stamps, etc.)
These investments often have different risk and return characteristics than traditional investments and may move independently of stock and bond markets, providing diversification benefits. However, many alternatives are less regulated, less liquid, and may involve higher fees or investment minimums.
I’ve dabbled in crypto and precious metals as a small portion (about 5%) of my overall portfolio. They’re definitely more speculative, but they’ve performed well during certain market conditions.
How to Choose the Right Investments for You
So how do you decide which of these investment types is right for YOU? Here are some factors to consider:
1. Risk Tolerance
Be honest with yourself about how much volatility you can handle. If market swings keep you up at night, you might want to focus more on bonds, CDs, and other lower-risk investments.
2. Time Horizon
- Short-term goals (less than 3 years): Consider CDs, high-yield savings accounts, and short-term bonds
- Medium-term goals (3-10 years): Consider a mix of bonds and stocks
- Long-term goals (10+ years): Can focus more heavily on stocks and real estate
3. Investment Knowledge and Experience
If you’re just starting out, mutual funds and ETFs might be better choices than picking individual stocks or alternative investments.
4. Income Needs
If you need current income from your investments, dividend-paying stocks, bonds, and REITs might be more suitable.
Building a Diversified Portfolio
The key to successful investing isn’t picking a single winning investment type – it’s about creating a diversified portfolio that includes several different types of investments. Here’s a simple example of how you might allocate your investments:
| Investment Type | Conservative Portfolio | Moderate Portfolio | Aggressive Portfolio |
|---|---|---|---|
| Stocks/Equity Funds | 30% | 60% | 80% |
| Bonds/Fixed Income | 50% | 30% | 10% |
| Real Estate | 10% | 5% | 5% |
| Cash/CDs | 10% | 5% | 5% |
| Alternatives | 0% | 0% | 0-10% |
Remember, these are just examples! Your ideal portfolio will depend on your personal financial situation, goals, and risk tolerance.
Tax Considerations for Different Investment Types
Different investments are taxed in different ways, which can significantly impact your returns:
- Stocks, ETFs, mutual funds: Taxed on dividends and capital gains (when you sell)
- Bonds: Interest income is typically taxed as ordinary income
- Real Estate: Rental income is taxed as ordinary income, but offers various deductions
- CDs: Interest is taxed as ordinary income
- Retirement accounts (IRAs, 401(k)s): Special tax treatment depending on account type
I always try to keep tax-efficient investments (like growth stocks) in my regular brokerage account and less tax-efficient investments (like bonds) in my tax-advantaged retirement accounts.
Final Thoughts
Understanding these 7 types of investments is your first step toward financial freedom! Start small, keep learning, and don’t be afraid to ask for help from a financial advisor if you need it.
I’ve found that the best investment strategy is one that you can stick with through market ups and downs. For me, that means a mix of all these investment types, adjusted based on my changing goals and risk tolerance.
What types of investments are you interested in trying? Have you had success with any particular investment strategy? Remember, the journey to financial independence is a marathon, not a sprint – take your time and make informed decisions.
Happy investing!
Deciding to Pursue a Career in Alternative Investments
If you’re interested in pursuing a career path that includes alternative investments, it’s important to consider your professional goals and which asset classes are most interesting to you. Perhaps you want to fund tech start-ups and get involved in venture capital, or maybe you’re more interested in tangible assets and want to break into the real estate business. Alternatives offer a variety of liquidity, industry, and time horizon options.
What Are Alternative Investments?
Alternative investments are asset classes that aren’t stocks, bonds, or cash. These kinds of investments differ from traditional investment types because they aren’t easily sold or converted into cash. It’s also common for alternative investments to be referred to as alternative assets.
One of the most dynamic asset classes, alternatives cover a wide range of investments with unique characteristics. Many alternatives are becoming increasingly accessible to retail, or individual, investors—making knowing about them increasingly important for all types of investors and industry professionals.
These types of investments can vary wildly in their accessibility and structure, but they share a few key characteristics:
- Theyre more lightly regulated by the US Securities and Exchange Commission (SEC) than traditional investments.
- Theyre illiquid, meaning they can’t be easily sold or otherwise converted to cash.
- They have a low correlation to standard asset classes, meaning they don’t necessarily move in the same direction as other assets when market conditions change.
While alternative investments share these key traits, theyre also a diverse asset class. Here are seven types of alternative investments everyone should know, what makes them unique, and how to think about them as investment opportunities.
The Basics of Investing (Stocks, Bonds, Mutual Funds, and Types of Interest)
FAQ
What are the 7 types of investments?
- Equities (otherwise known as stocks or shares)
- Bonds.
- Mutual Funds.
- Exchange Traded Funds.
- Segregated Funds.
- GICs.
- Alternative Investments.
What if I invest $1000 a month for 5 years?
If you would have invested ₹1,000 per month for 5 years at a conservative 10% p.a. return, you could have accumulated around ₹77,437 today. If you would have consistently invested ₹1,000 per month for 10 years, you could have accumulated a corpus of around ₹2,04,845 today (assumed returns of 10% p.a.).
What are the main types of investments?
You can make investments in stocks, bonds, real estate, precious metals, and more. You can invest with money, assets, cryptocurrency, or other mediums of exchange and choose different types of investment vehicles, such as stocks, bonds, mutual funds, and real estate.
What is the magnificent 7 in investing?
The magnificent seven are Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla. The second most exposed trust was Monks, which had 20.4% of its money in the seven companies, Stifel said.