Different Types of Investments
Overall, there are three different
kinds of investments. These include stocks, bonds, and cash. Sounds
simple, right? Well, unfortunately, it gets very complicated from
there. You see, each type of investment has numerous types of
investments that fall under it.
There is quite a bit to learn about
each different investment type. The stock market can be a big scary
place for those who know little or nothing about investing.
Fortunately, the amount of information that you need to learn has a
direct relation to the type of investor that you are. There are also
three types of investors: conservative, moderate, and aggressive. The
different types of investments also cater to the two levels of risk
tolerance: high risk and low risk.
Conservative investors often invest in
cash. This means that they put their money in interest bearing savings
accounts, money market accounts, mutual funds, US Treasury bills, and
Certificates of Deposit. These are very safe investments that grow over
a long period of time. These are also low risk investments.
Moderate investors often invest in
cash and bonds, and may dabble in the stock market. Moderate investing
may be low or moderate risks. Moderate investors often also invest in
real estate, providing that it is low risk real estate.
Aggressive investors commonly do most
of their investing in the stock market, which is higher risk. They also
tend to invest in business ventures as well as higher risk real estate.
For instance, if an aggressive investor puts his or her money into an
older apartment building, then invests more money renovating the
property, they are running a risk. They expect to be able to rent the
apartments out for more money than the apartments are currently worth –
or to sell the entire property for a profit on their initial
investments. In some cases, this works out just fine, and in other
cases, it doesn’t. It’s a risk.
Before you start investing, it is very
important that you learn about the different types of investments, and
what those investments can do for you. Understand the risks involved,
and pay attention to past trends as well. History does indeed repeat
itself, and investors know this first hand!
Determine Your Risk Tolerance
Each individual has a risk tolerance
that should not be ignored. Any good stock broker or financial planner
knows this, and they should make the effort to help you determine what
your risk tolerance is. Then, they should work with you to find
investments that do not exceed your risk tolerance.
Determining one’s risk tolerance
involves several different things. First, you need to know how much
money you have to invest, and what your investment and financial goals
are.
For instance, if you plan to retire in
ten years, and you’ve not saved a single penny towards that end, you
need to have a high risk tolerance – because you will need to do some
aggressive – risky – investing in order to reach your financial goal.
On the other side of the coin, if you
are in your early twenties and you want to start investing for your
retirement, your risk tolerance will be low. You can afford to watch
your money grow slowly over time.
Realize of course, that your need for
a high risk tolerance or your need for a low risk tolerance really has
no bearing on how you feel about risk. Again, there is a lot in
determining your tolerance.
For instance, if you invested in the
stock market and you watched the movement of that stock daily and saw
that it was dropping slightly, what would you do?
Would you sell out or would you let
your money ride? If you have a low tolerance for risk, you would want
to sell out… if you have a high tolerance, you would let your money
ride and see what happens. This is not based on what your financial
goals are. This tolerance is based on how you feel about your money!
Again, a good financial planner or
stock broker should help you determine the level of risk that you are
comfortable with, and help you choose your investments accordingly.
Your risk tolerance should be based on
what your financial goals are and how you feel about the possibility of
losing your money. It’s all tied in together.
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