Types Of Investments: What To Invest In?

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So, you’ve decided you want some of your hard-earned cash. But choosing exactly what to invest in can seem daunting. After all, there are many different types of investments and potentially thousands of choices within each category.

Each type of investment has its pros and cons and it often makes sense to invest in several different types of asset, depending on how long you have to invest, your appetite for risk (essentially meaning how well you cope with volatile prices), and what your end goal is.

It’s not a hard-and-fast rule but risk and reward often go hand in hand. The types of investment that potentially offer the greatest returns over the long term tend to be more volatile in price over shorter periods. Therefore, if you want higher returns you should expect the ride to be bumpier. Investments that promise high returns but low risk often turn out to be too good to be true.

7 types of investments

Let’s look at the main characteristics of seven different types of investment:

1. Stocks and shares

Stocks and shares, also known as equities, give you part ownership of a company. As a part-owner you are entitled to a share of any profits that are paid out as dividends and whatever money is available when the business is bought by someone else or wound down at the end of its life. You get to vote on certain matters like the appointment of directors.

Stocks and shares can either be publicly traded or private. Publicly traded means they are quoted on a stock market like the London Stock Exchange and you can buy or sell shares at the current price using a broker. Shares in a private company (also known as unlisted or unquoted shares) can be hard to trade as there is usually no ready market available and you have to find someone willing to buy or sell the shares.

When a publicly listed company is perceived to be doing well, investors will want to buy more of its shares and its price will tend to rise. When it’s doing badly, more people will want to sell, and the price will fall. If a company releases some unexpected news, revealing that it’s doing a lot better or worse than most people expected, that can result in quite a dramatic move in its share price.

Shares tend to offer higher rates of returns than most other types of investment. Prices rise and fall all the time as the market tries to find a balance between those people who want to buy and those that want to sell.

It’s not unusual for a stock market to be up 20% and down 20% over the course of the same year. However, individual stocks in a single company can move a similar amount over a single day so it’s important to learn how to build a diversified stock portfolio of different types of companies.

If you don’t want to buy individual stocks yourself, you can also buy funds that invest on your behalf and this can be a great way for beginners to get started with investing.

The Motley Fool believes stocks and shares are probably the best asset for building long-term wealth. Check out our list of top-rated share dealing accounts in the UK to find a brokerage that fits your needs.

2. Bonds

A bond is a loan to someone else, usually either a company or a government. Loans to companies are often called corporate bonds, a loan to the UK government is known as a gilt, and a loan to the US government is referred to as a treasury.

Bonds usually have a fixed rate of interest and can last for any period of time from a few months to years or even decades. The length of time a bond has left to run is called its maturity or duration. When a bond receives the end of the life, or matures, then the amount of the bond is repaid in full.

Bonds for larger companies and governments can be bought and sold on a market and, like stocks and shares, their price will move each day depending on supply and demand. When interest rates fall, bonds tend to rise in price as the fixed rate of interest they pay becomes more valuable. When rates fall, bonds tend to decrease in price. Bonds that have longer maturities (i.e., longer before they are due to be repaid) tend to be more sensitive to interest rate changes.

A bond might also decrease in price if the company or government behind it is seen as less likely to pay the interest it owes or the final amount due.

Bonds tend to return less than stocks and shares over the long term but are less volatile in price. They have been a good investment for the last few decades, though, as interest rates have moved steadily lower most of the time.

3. Property

Property has arguably been the favourite type of investment in the UK in the last few decades. Like most assets it comes in different flavours such as land, residential (housing), and commercial. Commercial property can be broken down into offices, shops, warehouses, industrial units, government buildings, and so on. Each type of property will therefore offer a different blend of risk and reward.

Unless you occupy the property yourself, you typically let someone else use it for a period of time (with the terms laid out in a lease document) and you receive a monthly or quarterly rental payment in return. A property’s value is based on its current rental amount times a multiple that will vary depending on how attractive it is deemed to be.

One important difference with property is that you often borrow money to buy this type of asset although any rental income should ideally cover the ongoing interest you have to pay. This ‘gears up’ your returns and can mean you can make a much higher return when you come to sell. This gearing can work against you should prices fall, and properties come with other ongoing costs in the form of repairs, maintenance, and certain taxes, all of which can reduce your returns.

The ability to borrow money against property makes it quite difficult to compare property returns against other types of investment. The underlying returns probably sit between bonds and stocks. Property prices tend to be less volatile than stocks but that’s partly because of the lack of easily comparable daily prices.

4. Commodities

A commodity is a basic good that is consumed, either because it gets eaten or drunk, or it’s used to make something. Think coffee, orange juice, wheat, rice for the former, and copper, oil, gold, silver for the latter. Importantly, a commodity should be uniform, i.e., one bar of gold is generally interchangeable for another, although it can often be broken down into different quality grades or types.

There are markets for most major commodities, so their prices change regularly, again depending on demand and supply. Commodity prices tend to be very volatile as the supply of these basic goods can vary widely from one season to the next or because a lot of the world’s supply comes from just a few locations. Temporary shortages or even problems with the physical delivery of a commodity can cause wild price swings.

Commodity prices often move in long cycles, being depressed for several years and then rising for a similar length of time. In terms of potential returns, commodities probably offer more than bonds but less than stocks and shares. However, they tend to be a lot more volatile than stocks and shares meaning that they are probably best avoided if you are just getting started and thinking about what to invest in.

5. Currencies

Many financial institutions and companies buy and sell different currencies, like the pound, the US dollar, the euro, and the yen. Some of this is pure speculation, betting that prices might move because one economy is going to become stronger than another, but in the case of companies it may just be part and parcel of what they need to do in order to operate and trade in various different countries across the world.

Currencies can be surprisingly volatile over short periods and this type of investment has a lot in common with commodities in that you probably need a lot of specialist knowledge and experience to do it profitably.

6. Cryptocurrencies

The newest type of investment on our list are cryptocurrencies like Bitcoin and Ethereum. These are digital currencies, not issued by any government, often developed using blockchain technology. The Bitcoin network was launched in early 2009 but there are now tens of thousands of cryptocurrencies with weird and wonderful names and widely different long-term prospects.

As this is such a new type of investment, we simply don’t know what its likely long-term returns will end up being. Price returns have been spectacular so far and we have recently seen a lot of larger investors become involved in this space for the first time, but price volatility is way, way greater than any other asset on this list.

Plenty of smart people think cryptocurrencies and blockchain technology could revolutionise every corner of the financial world. Plenty of other smart people think it’s all smoke and mirrors and destined to ultimately collapse. It could be either of these or somewhere in between!

7. Art and collectibles

Our final type of investment is probably the most diverse and some people might not even regard it as an asset class. It covers things like paintings, wine, stamps, old comic books, and so on. Essentially, it’s anything that has a novelty value because there are limited numbers available or it’s unique.

Like some of the other more specialised asset classes, you often only discover the price when you come to sell, and long-term returns are hard to gauge. You also incur costs just by owning these assets, in the form of insurance and storage, and they could get damaged and lose some or all of their value.

What to invest in?

You probably want a mixture of different asset types to spread your risk and diversify, although for most people, stocks, bonds and property are likely to be the three main ones to focus on. A lot of people already have exposure to property as they own a house or may have a mixture of stocks and bonds in their pension. So, it’s useful to consider what you already have before deciding what to invest in next.

Some types of assets are very easy to buy and sell and you can deal in pretty much any size you want from a few pounds to a few million. However, assets like art and directly held property are a lot harder to buy and sell and typically can’t be done piecemeal.

On a similar note, some assets require virtually no effort to hold onto whereas others require constant monitoring and ongoing costs. You can buy an index tracker that follows global markets and let it do its own thing for decades. If you own a rental property, you could get a call in the middle of the night saying urgent repairs are needed to fix a leak.

Finally, tax is another important consideration. Stocks and shares and bonds are relatively easy to shelter in tax-efficient vehicles like ISAs and pensions, whereas other more specialised types of assets are trickier and therefore could be more exposed to capital gains tax.

That concludes this guide on what to invest in and the various types of investments you can buy. We’ll close by emphasising once again that here at The Motley Fool, we’re huge fans of stocks and shares as a long-term wealth-building tool, and we’d encourage everyone to have a significant proportion of their net worth invested in the stock market in some shape or form.

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