There are a number of different investment strategies out there, and how you choose to invest your money depends on your tolerance for risk. Some investment strategies are more risky than others, but typically, the bigger risk, the bigger payoff.
Let’s start with an easy one – CDs. These aren’t really an investment; they’re more of a savings strategy. A CD is a certificate of deposit, and you get them through banks. You deposit an amount of money for a fixed term and earn a higher interest rate on it than you would in a traditional savings account. These are relatively low risk, because they are insured like your normal savings account. The only way you will lose money is if you withdraw not long after you open the CD. There are significant penalties to closing your CD early, often 3-6 months worth of interest. So if you open a CD and close it after two months and have to pay a 3 month penalty, you won’t get back what you originally invested. But if you close it after four months, you will get your money back and one month’s worth of interest. So it’s a pretty safe bet.
Bonds are another relatively safe method of investment. When you buy a bond, you are loaning your money to the government or a company. They promise to return your loan along with an interest rate. Essentially, it’s the same thing the mortgage company is doing with you – giving you money that you will ultimately pay back plus interest. Treasury bonds, bonds purchased from the U.S. Government are fairly safe – it’s unlike the U.S. Government is going to fall anytime soon. But because these are safe investments, the rate of return is also lower.
Next up, what most people think of when they think of investments: stocks. A stock is essentially a part-ownership in a company. Of course, when you’re looking at very big companies, one share of a stock is a very, very small part of that ownership. There is no guarantee in stocks. If you buy stock in a business and it does well, you can sell that stock for more than you paid for it. If it does poorly, you will lose money. And it’s possible that the value of your stock can crash to zero. But as I’m sure you can guess, different stocks come with different levels of risk. Much also depends on how long you’re willing to hold on to that stock. If you’re a short-term investor, you want that stock to grow quickly so you can make money fast. This is possible, but these stocks are often likely to also lose money fast. Other stocks may have ups and downs but over the years are showing a general trend upwards. Another methodology that some people use is to take a bit of money that they’re willing to invest on a riskier proposition and buy stocks in a product or company they really like. Perhaps you have a favorite brewery or purse manufacturer. Why not buy a few shares in their company?
Right now, much of my money is in mutual funds. These are definitely more “long-haul” investments and not for short term buying and selling. Mutual funds are essentially a collection of stocks and bonds. They can be from one specific country, international, or a combination of both. They can be stocks in large companies or small companies. They really vary, so when you choose a mutual fund, you want to be sure you’re choosing one that’s managed well, but not one that’s managed so well that you’re losing a bunch of your profit to fees. That’s right, you have to pay for that management.
Some people consider real estate to be an investment. And I suppose it is, though I definitely don’t consider my home primarily an investment. It’s where I live. Do I like that the value seems to be increasing? Of course! But if it’s an investment, it’s definitely long term for me, and I certainly don’t have the money to buy a second place as an investment property.
When the markets started to struggle, the price of gold went way up. You can buy gold in the same way you buy stocks, or you can buy it in bars and coins from various countries. That’s right, those coins you see advertised on late night TV as official U.S. gold are really gold coins issued by the U.S. government. Gold definitely has its ups and downs, but those who are fans of gold believe that it will keep purchasing power if the markets crash (which is likely true). That said, I have to believe there’s some significant risk in keeping a safe full of gold coins under your bed.
One interesting method of investing is binary options. These seem to have some of the fun of gambling, but with the added benefit that the result isn’t just random – so there’s definitely some skill involved. Binary essentially means “two parts” so this is basically a yes or no option. First, you choose the asset. Maybe you’re interested in the price of gold, or the price of oil. All options cost between $0 and $100, so you don’t need a ton of money to invest using binary options. Let’s say there’s an option out there that says “The price of oil will be above $45 at noon today.” (That’s an oversimplification, but go along with me here.) If you agree, you buy. Say that option is trading at $62, so you pay $62. At noon, if the price of oil is above $45, you are paid out $100, so your profit is $100 minus the $45 you invested, so a total of $65. If the price of oil is below $45, you receive zero, so you’ve lost your $45. This is an oversimplification, but if you love following certain industries, it can be a fun way to use that knowledge to make a bit of money. You can learn a whole lot more at Banc de Binary.
There are also stock options, which I won’t go into depth on here. It’s a more detailed way to invest in stocks. You can also check out FOREX, which is essentially currency trading. It’s very fast paced and open 24 hours, so if you’re a night owl, it might be for you.