What is investing?
What types of investments are there?
Here are some common kinds of investments to think about, from simple savings to complex:
High-yield savings accounts. Some savings accounts, known as high-yield accounts, pay a higher than usual interest rate. They typically have restrictions on the number of times you can access your money to justify the higher interest.
Money market accounts. These accounts are like hybrid checking and savings accounts and they earn more interest than the typical savings account. The downside is that they sometimes have expensive fees that can eat into your savings.
IRA. Individual Retirement Accounts help give you tax advantages with some restrictions. Traditional IRAs let you invest without being taxed upfront but you’ll pay tax when you withdraw in the future. Roth IRAs let you invest after paying taxes, which means you won’t pay taxes accessing your money later on.
CDs. CDs are offered by banks and pay more interest than a typical savings account. That’s because you agree to leave the money there, untouched, for a certain period of time. Typically the longer you agree to leave your money, the higher the interest rate.
Stocks. When you own a stock, you actually own a fraction of the company. Companies sell stocks in order to raise money to operate and grow their business. While risky, stocks have historically outperformed other investment vehicles.
Index/Mutual funds & ETFs. These types of investment funds let you buy multiple stocks at the same time.
Mutual funds. Handled by professional money managers, mutual funds invest your money in several companies across or within different business sectors, giving you an instantly diversified investment portfolio.
Index funds are similar, but they are created to track closely with the performance of a particular stock index (like the Nasdaq, Dow Jones Industrial Average or S&P 500).
ETFs (Exchange Traded Funds) are a lot like Index funds, except that they have greater restrictions on how and when they can be traded.
Understanding risk vs. reward
As you start to better understand investing options, you’ll see that some carry significantly more risk than others. Typically, the higher the risk, the higher the potential reward. You can make a lot of money buying stocks, but you can also lose it if the company fails. This is why it’s so important to understand exactly what you are investing in. Warren Buffet follows the rule of only investing in companies that you understand and truly believe will be successful. If you can’t say what a company does, then don’t invest.
As you explore investing options, it’s smart to think about how well you can handle a potential loss. Investments are for a long term return and you have to be prepared for a bad season or economic downturn. On average, stocks have compelling returns, but that does not mean every quarter or year has a positive return. Most importantly, start thinking about how you want to invest now. It’s never too early to start a plan to be prepared for the future.