The Basic Types of Investments

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For someone beginning to invest, there are a variety of options to choose from, depending on the cash at hand and the risk tolerance of the investor.

Perhaps the most recognizable type of investment is in the stock market. Owning a stock is akin to owning a piece of a company. There are two basic methods to making money off of stocks – stock prices can go up (depending on the growth of the company) and can be later sold at a profit, or stockholders can get paid dividends from the company.  If money is hard to come by at the time being, penny stocks are also a viable alternative.

That being said, the stocks (at least in the United States) trade in exchanges such as the NASDAQ, Dow Jones, and S&P 500. ETFs are another type of security that can be traded, with their unique attribute being the fact that they follow the index of the exchange they’re being traded on.

Bonds act as financial instruments and have similar properties to a loan. An investor can issue a bond, and in return receive the initial value of the bond along with regular interest payments. Like stocks, the value of the bond can fluctuate up or down, depending on the condition of the market.

Mutual funds are similar to ETFs, but are pooled/joint investment funds. The benefit of mutual funds lies in the fact that they allow an investor to have a wide variety of active holdings, yielding in a portfolio with higher diversification and lower risk.

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