Whenever you’re learning something new, it feels like you’re sailing into uncharted waters. When learning the basics of investing, you have to get familiar with the basic lingo – in order to properly navigate through the world of investing, you have to know what stocks, bonds, and other investment vehicles are.
Of course, once you master the vernacular, you’ll be able to understand how the system works and start making investments that will secure your financial future. To help you start, we’re going to provide a short overview of the most common type of investments you’ll come across along your journey.
Investing in Bonds and Stocks
Throughout history, the best way of building wealth is through stock investing. On the other hand, for more than a century at this point, buying bonds has been possibly the most secure way of making money. Now, you’re probably wondering how all of this works.
Both processes are pretty simple. Stocks are a share of ownership in specific companies. For instance, if you own a share of Google, you have a small piece of the company. The prices of stocks fluctuate depending on the fortunes of that specific company and the economy as a whole.
Buying bonds mean you’re “borrowing money” to a certain company. For example, if you buy some school bonds, you’re lending the money to the school district to help it build new schools. And if you buy bonds commissioned by certain companies, you’re helping that company grow its business.
Investing in Mutual Funds
This is perhaps the most popular way to own bonds or stocks – especially among the less experienced crowd. This is because mutual funds offer a ton of benefits other investment vehicles don’t, particularly if you’re not too experienced.
For instance, they are easy to master and cost far less than other investments, plus they allow you diversify your portfolio. Tier biggest downside is that they may increase your tax bill – even if you don’t sell any shares at all during the year.
Investing in Real Estate
Some people out there think that real estate investments are the only investments that make any sense from a financial point of view. While some of you probably don’t subscribe to that philosophy, there’s a number of different ways you can add real estate to your portfolio.
Of course, if you own your own home, you already have some real estate in your portfolio, but you can still start buying or renting properties in your local area. If you want to combine the perks of owning stocks and property such as land, you can buy a REIT or a real estate investment trust.
The Basic Structures and Entities
People who move past the basic investments we listed above start encountering a wide variety of different investment entities. You see, some people have never owned stocks or bonds in their lives, since they decided to invest in a family business, like a mom-and-pop shop or a restaurant.
What’s more, seasoned investors usually invest their money in private equity and hedge funds at some point in their career and other purchase shares of publicly traded partnerships through a brokerage company. These have huge tax implications, so before you start investing, you have to get familiar with their implications properly.
The Bottom Line
Seeing how there are so many different terms associated with the investment world, knowing what, when and where to invest may seem overly-complicated at first. However, once you become familiar with all the terms, and once you organize them into categories, it’s not too difficult to understand how they actually work.