Types of investments and how they work

As a new investor, you have many options to build wealth. There is no shortage of different types of investments available! But how do you know which one is the best option? While only you can answer that question (it's a personal decision, after all), getting familiar with types of investments may help you choose.

1. Stocks: Ownership and growth

Of all types of investment, stocks may be the most recognizable. You probably hear about them in the news and on social media. Stocks represent a share of ownership in a company. 

A stock provides earning potential in two ways: dividends and appreciation. Some companies issue dividends to shareholders several times annually. The dividend is a cash payment, which you can reinvest or keep. Appreciation occurs when the share price increases above its purchase amount. You profit the difference if you sell the share at a higher amount.

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2. Bonds: Fixed income and security

Corporations and governments issue bonds that you can buy. When you purchase a bond, you're essentially making a loan to an entity in exchange for periodic interest payments. At the end of the bond's term, the entity repays you the bond's face value.

A bond's market value may fluctuate, and you can usually resell it if you prefer not to keep it for the entire term. 

3. Certificates of deposit (CDs): A low-risk investment

If your risk tolerance is low and you prefer a set rate of return, CDs may be a good choice for you. You can also use CDs as part of a larger diversification strategy by putting a portion of earnings into a CD and other amounts elsewhere.

You can purchase a CD at most banks and credit unions, and some online financial institutions offer them, too. Once you put your money in the CD, interest will be earned according to the terms of your agreement. Once the CD expires, you can withdraw your money or reinvest it to earn additional interest.

4. Mutual funds: Pooling resources for broader exposure

Many investors opt to invest in professionally managed mutual funds. A mutual fund pools money from its investors to purchase stocks, bonds, and other types of investments. This way, you get exposure to various investments without buying them outright. Mutual funds may offer dividend payments and fluctuate in value. 

5. Annuities: Insurance contracts and periodic payments

Some insurance companies sell annuities, which are contracts that provide guaranteed income. These contracts can be beneficial in retirement if they provide extra money to live on. An annuity's payment structure can vary. Some offer monthly payments until the investor dies, while others last for a specific term or period. Annuity income may begin immediately after purchasing the contract or be deferred to gain value.

6. Commodities: Physical products to invest in

Raw materials used to make goods, such as oil, gold, and cotton, are traded as commodities. Their price fluctuates based on economic conditions and consumer needs. As one of the more complex assets, they may not be a suitable investment for beginners.

7. Index funds: Passively tracking an index

An index fund pools different stocks or bonds to imitate returns on a financial market index such as the S&P 500 or the Dow Jones Industrial Average. Well-managed index funds appreciate just like their index, but they're passive investments — you don't have to participate in the fund's operations. So, if you own an ETF tracking the S&P 500, and the S&P 500 appreciates 10% over the year, your ETF should grow by the same amount.

8. Exchange-traded funds (ETFs): Flexibility and diversification

Exchange-traded funds combine features of stocks and mutual funds. They trade on a stock market exchange so you can buy one for your investment portfolio through different investment account types. Each ETF owns shares of stocks or bonds, so you get exposure to a range of assets. ETFs may focus on different sectors, such as tech, or track an index. ETFs may appreciate, and some provide dividends.

9. Real estate: Tangible assets and rental income

Investing in real estate may mean buying an actual property, like a house, or investing in a real estate investment trust (REIT). Buying property requires a significant upfront investment, but you may build equity as its value grows. 

If eligible, you could also rent the property to tenants for an income stream. If you want exposure to real estate but don't have the cash to buy property, investing in a REIT can help you diversify your portfolio and earn dividends on your shares.

10. Cryptocurrencies: Digital currencies and market volatility

A cryptocurrency is a type of decentralized digital currency. No government bank owns or issues cryptocurrency. Instead, transactions occur on a public ledger, the blockchain. One of the most well-known cryptocurrencies is Bitcoin. A cryptocurrency's value may swing wildly, so it comes with higher levels of risk.

11. Non-fungible tokens (NFTs): Unique digital assets and ownership rights

Non-fungible tokens (NFTs) are alternative investments in digital creations. The owner of the NFT gains rights to the original item like an art collector might buy a watercolor painting. You can buy NFTs through some types of investment accounts and NFT marketplaces.

Learning how to invest and the best way to start

Knowing the types of investments can help you decide where to put your money. However, it may also help to learn about different investment concepts, like understanding what dividend growth rate is, or the benefits of portfolio diversification. 

Investing with Greenlight makes it easy to track your assets and research ETFs and stocks. Kids, teens, and even parents can learn how investing works and try it out. And, when you upgrade to the Infinity plan, you earn 5% on savings.* 

*Greenlight Core and Greenlight + Invest families can earn monthly rewards of 1% per annum, Greenlight Max families can earn 2% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.