Is Investing Just Stock Trading?

Brokers, Investing
shutterstock_216588856

When it comes to investing, most people think immediately of trading stocks. That’s just one choice, though; depending on your needs, investing in other securities may serve you better in the long run. Before you decide where to put your money, consider these possibilities:

Bonds

Unlike stocks, bonds have fixed interest rates, which make them especially appealing for investors who are nearing retirement. Bonds, which are sold by companies and governments – both U.S. and foreign — to finance various projects, typically offer high liquidity and low risk.

Buying a bond basically means that you’re giving a loan to a certain entity – the U.S. government, for instance, if you’re buying a U.S. bond – with the assurance that it will be able to pay you back with interest.

If you choose to invest in bonds, be wary of those with very high interest rates and low credit ratings. These securities, known as junk bonds, have high default rates and low liquidity, making them very risky investments.

Mutual Funds

Mutual funds are composed of a variety of securities that provide consumers with diversified portfolios without requiring large investments. With these types of funds, consumers can also reap the benefits of professional management.

One potential downside to investing in actively traded mutual funds is that you could end up paying a large amount in management fees that could eat away at your earnings. Professional management could be a boon in some cases, but oftentimes, index funds that mirror a certain market can do just as well, if not better. If you feel like your actively managed mutual funds are charging too much in fees, consider trading these passively managed mutual funds instead.

Exchange-traded funds

Exchange-traded funds, or ETFs, are passively managed index funds that allow investors to pay less in fees while diversifying their portfolios. Within the past two decades, ETFs have changed the game of investing by allowing people to diversify their portfolios with stocks, bonds and other securities at a very low cost.

Currently, several automatically managed investment services, such as Wealthfront, Betterment and SigFig, invest their clients’ money in ETFs to maintain their razor-thin margins.

It’s important to note, though, that ETFs still charge some management fees, unlike stocks. Because they can comprise completely arbitrary collections of securities, not all ETFs perform similarly. Smaller, specialized ETFs might focus on a single industry, providing investors with less diversity and more volatility. Before investing in an ETF, find out which market index it follows and how large it is; this will give you a better sense of how vulnerable it might be during economic ups and downs.

Real estate investment trusts

Real estate investment trusts, or REITs, allow investors to put their money into real estate the way mutual funds allow investors to put their money into stocks and bonds. If consumers want to invest in real estate, instead of buying pieces of land or houses, they can purchase a REIT instead from a real estate company. This allows them to own several small shares of property at once.

In general, REITs offer high yields and high liquidity, making them an appealing investment for many consumers. One potential pitfall, however, is that their value is correlated with the housing market, which can be unpredictable at times.

Other investments

Aside from mutual funds, ETFs, bonds and REITs, choices abound for investors looking for ways to grow their assets. Some are riskier and more speculative – such as options, currency and commodities – while others, such as certificates of deposit (CDs), offer greater security but less liquidity.

Before putting money into a riskier security, ask yourself if you would still be financially secure if you lost a large portion of your investment. If the answer is no, opt for a lower-risk instrument instead.

Finding the investment that’s right for you

When picking stocks, it can sometimes seem like the entire point of investing is beating the market. That doesn’t have to be the case, though. By investing in securities that match the market or are less volatile, you can achieve steady growth and earn enough to invest in your future. For many, that’s a goal worth pursuing.


Stock illustration via Shutterstock.