Investing money is one of the best ways to grow wealth and save for retirement or other goals. But where to invest is personal and depends on your investment horizon and tolerance for risk.
Stocks are shares of a company that can earn dividends, generate capital gains and come with voting rights. You can also invest in bonds and CDs, which offer lower returns but are more stable.
Stocks
Stocks (also known as company shares, equities or assets) represent partial ownership of a company and can be an important part of your investing portfolio. Stocks can be fairly liquid and often provide higher returns than other asset classes over the long term.
Choosing the right stocks for your investment objectives requires research into the company and industry, as well as your risk tolerance and time horizon. The longer your investing horizon, the more you may be willing to take risks for potential higher returns.
The stock market can be volatile, and even stable companies may experience temporary price dips. To limit the downside risk, it’s a good idea to diversify your portfolio by also including other types of investments. Investing in different stocks and using a stock mutual fund or ETF can help reduce overall risk. Online brokerages now offer low account minimums, making it easier to get started. Be sure to compare account fees and features before choosing a broker.
Bonds
Bonds are debt securities that give investors a fixed, predetermined stream of interest payments. They can be issued by a wide range of entities, including corporations and government-sponsored institutions such as municipal or federal bonds. As long-term investments, bonds offer a range of benefits that can be important in building an investment portfolio, such as diversification and income generation. However, bonds also have their risks and don’t provide the same level of growth potential as stocks.
When investing in individual bonds, it is important to understand the creditworthiness of the issuer and to determine your risk tolerance. A bond’s price is influenced by a variety of factors, such as current and future interest rates. At maturity, bondholders will receive their principal—also known as the face value—back. The maturity date can range from one day to 100 years, depending on the bond’s length. Bond prices fluctuate, and investors who sell before maturity may not receive the full face value of their investment.
CDs
CDs offer a safe place to invest money with a predictable return. They usually pay a higher rate than savings accounts or money market funds, but lower than stocks and bonds.
To find the best CD rates, shop around and compare rates from online banks, credit unions, community banks, and brokerage firms. These institutions often have lower overhead than brick-and-mortar banks, and they may also offer bonuses and special rates for larger deposits.
You can even choose a bump-up CD, which allows you to increase your interest rate once during its term. However, be careful not to withdraw money before it matures, as early withdrawal penalties can be steep. Also, a CD’s return won’t rise with the stock market, and inflation could reduce its value over time. To minimize these risks, diversify your investments and consult a financial planner.
Index Funds & ETFs
Both index funds and exchange-traded funds (ETFs) are often low-cost and passively managed, so they can be a “set it and forget it” type of investment. When shopping for both, look for a broker that offers a wide selection from different fund families, including those that have been historically performing well.
Many of the best index funds or ETFs land in one of the specialized stock and bond categories, and many offer low fees. They can be an excellent option for investors who want to fill more niche roles in their portfolios, such as those seeking to blunt the effects of inflation.
When choosing any fund, carefully consider its underlying holdings. You can do this by looking up its portfolio in an online database like Morningstar. This can help you identify any potential problems or opportunities, such as high-risk stocks that are not aligned with your overall investing objectives. Also, make sure you check the fund’s expense ratio.