Investing 101: Different Ways to Invest
When you hear someone talk about investing, the first thing that probably comes to mind is the stock market. However, there are many ways to invest! For example, placing money into a savings account to protect yourself from inflation counts as investing. This article will introduce you to various ways to invest.
Stocks
When you buy the stock of a company, you’re buying a share of ownership in the company. Owning stocks can provide a return on investment usually through 2 ways: The stocks’ price appreciating (increasing in value) or through dividends (explained below!).
There are a few ways you can dive into investing with stocks, one of which is long-term investing. Long-term investing means you buy a stock and hold it for usually more than a year, hoping that it appreciates over time. Usually stocks do appreciate over the long-term (roughly 8-10% per year), but this does not mean that stocks appreciate every year; stocks are volatile and will go up and down throughout each year.
Another approach you can take when investing in stocks is dividend investing. With dividend investing, you would target stocks that provide dividends, which are usually quarterly payments made to shareholders out of the company’s revenue. Using this method, one would target stocks that yield a large dividend so that they can have some passive income.
One other approach someone can take when investing in stocks is day trading. Day trading is the practice of buying and selling securities on the same trading day. Day traders leverage a large amount of capital to buy stocks, then hopefully sell the stocks at a higher value later in the day to yield a capital gain. There are multiple strategies that someone can use to approach day trading, including scalping, news-based trading, among others.
Exchange-Traded Funds (ETFs)
An ETF is similar to stocks in the sense that you can buy and sell them the same way. However, unlike stocks, an ETF holds multiple assets rather than just one. For example, SPDR S&P 500 ETF (SPY) tracks the S&P 500, meaning the managers of SPY purchase and sell stocks to align themselves with the S&P 500. Essentially, when you buy SPY you hold a small portion of each stock in the S&P 500, allowing yourself to diversify (hold different assets to minimize risk).
Link to S&P 500: https://www.bloomberg.com/quote/SPX:IND
Here we can see that the S&P 500 trends upwards in the long run
Credit: https://static01.nyt.com/images/2020/08/11/business/newhigh-promo/newhigh-promo-superJumbo.jpg
Think of an ETF as an Easter basket with a bunch of goodies for $20, while a stock is a huge king sized chocolate bar (also for $20). With the Easter basket, you can try a variety of different goodies, and if you don’t like one of the candies in the basket, it’s okay! You can just get rid of it; the amount that you are losing from throwing it out is small. Whereas if you don’t like the chocolate bar, you’re losing the whole chocolate bar and the $20!
There are a variety of ETFs:
Industry ETFs: There are Industry ETFs that track a certain industry, like energy or technology. If you think a particular industry is going to do well, maybe you would consider an ETF that tracks that industry.
Commodity ETFs: Commodity ETFs track a certain commodity such as gold or silver.
Currency ETFs: Interested in foreign exchange? A Currency ETF tracks foreign currencies such as the Euro or Japanese Yen.
Bond ETFs: Bond ETFs might include a basket of bonds such as government or corporate bonds.
There are many many more types of ETFs out there!
Mutual Funds
Mutual funds work and function in a similar nature to ETFs, however there are some key differences. Mutual funds are managed by someone who actively attempts to beat the market while ETFs are usually passively managed. This means that mutual funds have a higher expense ratio compared to an ETF. An expense ratio is like a subscription that you pay in order to own a unit of the fund. Additionally, mutual funds tend to have higher barriers of entry, meaning you need more capital to invest in a mutual fund.
Index Funds
Index funds are like a hybrid of ETFs and mutual funds. Index funds also include a basket of goods, like ETFs and mutual funds. They are like mutual funds since they have a higher barrier to entry, requiring investors to have a higher sum of capital to own a unit of an index fund. On top of that, they are like ETFs for their lower expense ratios.
Bonds
Bonds are units of debt that can be tradable. Most bonds have these few main components: issue price, face value, the coupon rate, the coupon date, and the maturity date.
The issue price is the price that you pay for the bond. The coupon date is the date that the bond issuer will pay you an interest payment (which is determined by the coupon rate). The maturity date is when the term of the bond ends. This is the date that the issuer of the bond will pay you the face value of the bond, which is usually (but not always) higher than the issue price of the bond
Okay cool. I can buy a bond and get some money back through interest payments and a higher face value. But what exactly are bonds? Well, bonds usually come in two formats: those issued by the government and those issued by corporations.
Government bonds, such as those issued by the US government, can be sold to finance debt. In the case of the US government, they spend more money than they collect in taxes! Ever wonder where this extra spending comes from? The answer is bonds!! The US government borrows money from the private sector in the form of bonds to fund itself. In return for borrowing money, the government pays interest to the lender on the coupon dates and returns the amount they borrowed on the maturity date.
Corporate bonds work in a similar fashion. If a company needs to borrow money to finance a project, they can issue bonds to get the capital they need. For example, if NYU wanted to build new buildings in New York, they could issue bonds to finance such a project.
To sum bonds up, they are like dividend stocks in the sense that they pay you regularly on coupon dates. Unlike dividend stocks, bonds have a guaranteed face value when they mature. While the equity of your dividend stock can drop due to business cycles, this makes bonds a less risky investment compared to dividend stocks.
Certificates of Deposit (CD)
CDs are what you get if you created a hybrid of savings accounts and bonds. CDs are offered by banks or other financial institutions that offer you an interest rate in exchange for giving the bank a lump sum of money for a period of time. Essentially, you’re giving some money to a bank, then you’ll get back that money with a couple of extra bucks on top of that.
CDs are a safer investment when compared to stocks since there is a guaranteed return on investment. However, since the risk is lower here, the reward would also be less.
Real Estate
Investing in real estate tends to require you to have a lot of capital. One way you can invest in real estate is to own rental properties. With rental properties, you hold real estate that grows in value over time, but also provides you with a steady stream of income through monthly rental payments. Another way to invest in real estate is house flipping. To do this, someone would purchase a house that is in need of repair. After buying the house, a house flipper would repair the property and resell the house at a higher price, thus recouping the initial purchase price of the house and then some extra cash.
Now, what if you don’t have a lot of capital to buy a rental property or a house to flip? There are two other ways one could invest in real estate that do not require a huge amount of capital. Real estate crowdfunding is one of them. Essentially, you pay to own part of a property rather than owning it outright. This means that if the property is a rental property, any rental income that is collected means that you’re only entitled to a percentage of the rental property. For example, if you paid for 5% ownership on a property, you’re only entitled to 5% of the income generated. Real Estate Investment Trusts (REITs) are like mutual funds, but for real estate. A REIT would own income-generating properties and pay some of the income they generated off to investors in the form of dividends.
Foreign Exchange
Foreign exchange is another way someone could invest their money. In simple terms, you’re betting that the value of one currency will increase in relation to another currency. For example, let’s say I currently have 100 USD (100 USD equates to roughly 100 euros). But, I believe for some reason that euros will be worth more in the future (the same amount of euros would give me more USD). I would convert my 100 USD into euros. Then in the future, if 100 euros is now worth 200 USD, I just made a profit of 100 USD by moving my money around.
Cryptocurrencies
Investing in crypto is similar to foreign exchange in the sense that you are placing the units of your money into something else that you believe will do better. However, crypto is more volatile than the foreign exchange market.
Let’s take a look at Bitcoin as an example of volatility:
Credit: https://s3.cointelegraph.com/storage/uploads/view/86c55b8d33221673bb5d6b228c8a5233.png
Bitcoin is considered to be volatile as the price changes wildly from day-to-day and is super unpredictable. Rather than trending upwards like the S&P 500, there is no clear trend line.
Aside from Bitcoin (BTC), there are other crypto currencies such as Bitcoin Cash (BCH), Litecoin (LTC), Ethereum (ETH), Binance Coin (BNB), and more!
Commodities
Commodities are tangible items that you can buy. Common commodities include gold and silver. The biggest risk of investing in commodities is the price of your commodity dropping rapidly. For example, if someone were to hold a lot of oil as a commodity, then as the price of oil drops rapidly, the value of your commodity holdings also drop.
This list of ways to invest is in no way an exhaustive list, but hopefully this article has sparked your interest in investing and has expanded your view on what investing is. In the coming weeks, we’ll dive in deeper on each individual method of investing and the risks associated with them.
This website below might help you find different places to invest your money: https://finviz.com/