You probably have things you want to do with your money down the road: buy a house, save for retirement, fund college for your kids, maybe even go on a big trip or do a major remodel. And you may be wondering if investing can help you achieve those goals.
It’s never too early or too late to start investing. There are a number of different ways you can put your money to work, including choosing different investment types.
Different Types of Investments for Diversification
Before deciding on your investments, ask yourself what your financial goals are. Then try to build a portfolio that achieves those goals, balancing risk with return and maintaining a diverse mix of assets.
Having different types of investments, as well as short term vs long term investments can help you achieve portfolio diversification.
Bonds are essentially loans you make to a company or a government — federal or local — for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime.
When it comes to bonds vs. stocks, the former are typically backed by the full faith and credit of the government or large companies. Because of this, they’re often considered lower risk than stocks.
However, the risk varies, and bonds are rated for their quality and credit-worthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be some of the least risky investments. However, they also tend to have lower returns.
Different Types of Bonds
Treasurys: These are bonds issued by the U.S. government. Treasurys can have maturities that range from one-month to 30-years, but the 10-year note is considered a benchmark for the bond market as a whole.
Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.
Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest. High-yield bonds, also known as junk bonds, tend to have higher yields but lower credit ratings.
Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.
Zero-coupon bonds: Zero coupon bonds may be issued by the U.S. Treasury, corporations, and state and local government agencies. These bonds don’t pay interest. Instead, investors buy them at a great discount from their face value, and when a bond matures, the investor receives the face value of the bond.
Pros and Cons of Bonds
If you’re thinking about investing in bonds, these are some of the benefits and drawbacks to consider:
• Bonds offer regular interest payments.
• Bonds tend to be lower risk than stocks.
• Treasurys are considered to be safe investments.
• High-yield bonds tend to pay higher returns and they have more consistent rates.
• The rate of returns with bonds tends to be much lower than it is with stocks.
• Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell.
• Bonds can decrease in value during periods of high interest rates.
• High-yield bonds are riskier and have a higher risk of default, and investors could potentially lose all the money they’ve invested in them.
💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.
When you think of investing and investment types, you probably think of the stock market. They are, essentially, investment fund basics. A stock gives an investor fractional ownership of a public company in units known as shares.
Only public companies trade on the stock market; private companies are privately owned. They can sometimes still be invested in, though the process isn’t always as easy and open to as many investors.
A stock makes money in two ways: It could pay dividends if the company decides to pay out part of its profits to its shareholders, or an investor could sell the stock for more than they bought it.
Some investors are looking for steady streams of income and therefore pick stocks because of their dividend payments. Others may look at value or growth stocks, companies that are trading below their true worth or those that are experiencing revenue or earnings gains at a faster pace.
Pros and Cons of Stock Investments
Stocks have advantages and disadvantages to be aware of before investing in them. These include:
• If the stock goes up, you can sell it for a profit.
• Some stocks pay dividends to investors.
• Stocks tend to offer higher potential returns than bonds.
• Stocks are considered liquid assets, so you can typically sell them quickly if necessary.
• There are no guaranteed returns. For instance, the market could suddenly go down.
• The stock market can be volatile. Returns can vary widely from year to year.
• You typically need to hang onto stocks for many years to achieve the highest potential returns.
• You can lose a lot of money or get in over your head if you don’t do your research before investing.
Although stocks and bonds are the more traditional assets to invest in, there are other types of investments known under the broad category of “alternatives.” These different investment options are not necessarily tied to the stock or bond market, so they can provide some diversification potential. Below is a guide to alternative investments and how they work.
Owning real estate, either directly or as part of real estate investment trust (REIT) investing or limited partnerships, gives you a tangible asset that may increase in value over time.
If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.
Pros and Cons of Real Estate
Before you invest in real estate, be sure to consider the pros and cons, including:
• Real estate is a tangible asset that tends to appreciate in value.
• There are typically tax deductions and benefits, depending on what you own.
• Investing in real estate with a REIT can help diversify your portfolio.
• By law, REITs must pay 90% of their income in dividends.
• REITs offer more liquidity than owning rental property you need to sell.
• REITs don’t require the work that maintaining a rental property does.
• Real estate is not liquid. You may have a tough time selling it quickly.
• There are constant ongoing expenses to maintain a property.
• Owning rental property is a lot of work. You have to handle managing it, cleaning it, and making repairs.
• With a REIT, dividends are taxed at a rate that’s usually higher than the rate for many other investments.
• REITs are generally very sensitive to changes in interest rates, especially rising rates.
• REITs can be a risky short-term investment and investors should plan to hold onto them for the long term.
A commodity is a raw material — such as oil, gold, corn or coffee. Trading commodities has a reputation for being risky and volatile. That’s because they’re heavily driven by supply and demand forces. Say for instance, there’s a bad harvest of coffee beans one year. That might help push up prices. But on the other hand, if a country discovers a major oil field, that could dramatically depress prices of the fuel.
Investors have several ways they can gain exposure to commodities. They can directly hold the physical commodity, although this option is very rare for individual investors (Imagine having to store barrels and barrels of oil).
So many investors wager on commodity markets via derivatives — financial contracts whose prices are tied to the underlying raw material. For instance, instead of buying physical bars of precious metals to invest in them, a trader might use futures contracts to make speculative bets on gold or silver. Another way that retail investors may get exposure to commodities is through exchanged-traded funds (ETFs) that track prices of raw materials.
Pros and Cons of Commodities
These are the benefits and drawbacks of commodities for prospective investors to consider, such as:
• Commodities can diversify an investor’s portfolio.
• Commodities tend to be more protected from the volatility of the stock market than stocks and bonds.
• Prices of commodities are driven by supply and demand instead of the market, which can make them more resilient.
• Investing in commodities can help hedge against inflation because commodities prices rise when consumer prices do.
• Commodities are considered high-risk investments because the commodities market can fluctuate based on factors like the weather. Prices could plummet suddenly.
• Commodities trading is often best left to investors experienced in trading in them.
• Commodities offer no dividends.
• An investor could end up having to take physical possession of a commodity if they don’t close out the position, and/or having to sell it.
Only public companies sell shares of stock, however private companies do also look for investment at times — it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.
Pros and Cons of Private Companies
Investing in private companies could have the following benefits and drawbacks:
• Potential for good returns on your investment.
• Lets investors get in early with promising startups and/or innovative technology or products.
• Investing in private companies can help diversify your portfolio.
• You could lose your money if the company fails.
• The value of your shares in the company could be reduced if the company issues new shares or chooses to raise additional capital. Your shares may then be worth less (this is known as dilution).
• Investing in a private company is illiquid, and it can be very difficult to sell your assets.
• Dividends are rarely paid by private companies.
• There could be potential for fraud since private company investment tends to be less regulated than other investments.
A cryptocurrency is a kind of digital currency that uses encryption and coding techniques for security. These currencies are independent and separate from fiat currencies-like the U.S. dollar or euro — which are examples of money issued by a government or central bank.
There are a number of different cryptocurrencies out there: Bitcoin was the first digital currency and is the most well-known. However, cryptocurrency prices have historically been very volatile, and the market is therefore considered to be a risky type of investment.
Pros and Cons of Cryptocurrency
These are some of the pros and cons of cryptocurrency to consider before investing in them:
• Possible potential to make money quickly. For instance, some cryptocurrencies have had short periods of significant gains (though then their value often fell).
• Investments in cryptocurrency are transparent because data is recorded on an open, public ledger powered by blockchain technology.
• Investing in cryptocurrency is extremely risky.
• Cryptocurrency prices are notoriously volatile.
• Cryptocurrency can lose its value very quickly.
• Cryptocurrency is generally not formally regulated at the moment.
• Cryptocurrency is digital. If you lose your key to your digital wallet (aka the “place” where your crypto is stored), you lose access to your investment.
Overview of Investment Products
A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.
Pros and Cons of Mutual Funds
If you’re thinking about investing in mutual funds, these are some pros and cons to be aware of:
• Mutual funds are easy and convenient to buy.
• They ate more diversified than stocks and bonds so they carry less risk.
• A professional manager chooses the investments for you.
• You earn money when the assets in the mutual fund rise in value.
• There is dividend reinvestment, meaning dividends can be used to buy additional shares in the fund, which could help your investment grow.
• There is typically a minimum investment you need to make.
• Mutual funds typically require an annual fee called an expense ratio and some funds may also have sales charges.
• Trades are executed only once per day at the close of the market, which means you can’t buy or sell mutual funds in real time.
• The management team could be poor or make bad decisions.
• You will generally owe taxes on distributions from the fund.
Exchange traded funds can appear to be similar to a mutual fund, but the main difference is that ETFs can be traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. They also come in a range of asset mixes.
Pros and Cons of ETFs
Investing in ETFs has advantages and disadvantages, including:
• ETFs are easy to buy and sell on the stock market.
• They often have lower annual expense ratios (annual fees) than mutual funds.
• ETFs can help diversify your portfolio.
• They are more liquid than mutual funds.
• The ease of trading ETFs might tempt an investor to sell an investment they should hold onto.
• A brokerage may charge commission for ETF trades.This could be in addition to fund management fees.
• May provide a lower yield on asset gains (as opposed to investing directly in the asset).
An annuity is an insurance contract that an individual pays upfront and, in turn, receives set payments.
There are fixed annuities, which guarantee a set payment, and variable annuities, which put people’s payments into investment options and pay out down the road at set intervals. There are also immediate annuities that begin making regular payments to investors right away.
Pros and Cons of Annuities
Before investing in annuities, it’s wise to understand the pros and cons.
• Annuities are generally low risk investments.
• They offer regular payments.
• Some types offer guaranteed rates of return.
• Can be a good supplement investment for retirement.
• Annuities typically offer lower returns compared to stocks and bonds.
• They typically have high fees.
• Annuities are complex and difficult to understand.
• It can be challenging to get out of an annuities contract
There are several types of derivatives but two popular ones are futures and options. Futures contracts are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.
Meanwhile, in options trading, buyers have the right, but not the obligation, to buy an asset at a set price.
A derivatives trading guide can be helpful to learn more about how these investments work.
Pros and Cons of Derivatives
There are a number of advantages and disadvantages to weigh when it comes to investing in derivatives.
• Derivatives allow investors to lock in a price on a security or commodity.
• They can be helpful for mitigating risk with certain assets.
• They provide income when an investor sells them.
• Derivatives can be very risky and are best left to traders who have experience with them.
• Trading derivatives is very complex.
• Because they expire on a certain date, the timing might not work in your favor.
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Investment Account Options
An investor can put money into different types of investment accounts, each with their own benefits. The type of account can impact what kinds of returns an investor sees, as well as when and how they can withdraw their money.
A 401(k) plan is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.
Pros and Cons of 401(k)s
These are the pros and cons of investing in a 401(k):
• Contributions you make to a 401(k) can reduce your taxable income. The money is not taxed until you withdraw it when you retire.
• Contributions can be automatically deducted from your paycheck.
• Your employer may provide matching funds up to a certain limit.
• You can roll over a 401(k) if you leave your job.
• There is a cap on how much you can contribute each year.
• Most withdrawals before age 59 ½ will incur a 10% penalty.
• You must take required minimum distributions from the plan (RMDs) when you reach a certain age.
• You may have limited investment options.
IRA stands for “individual retirement account” — so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money pre-tax for retirement without needing an employer-backed 401(k).
Pros and Cons of IRAs
The advantages and disadvantages of IRAs include:
• Contributions are tax deferred. You don’t pay taxes until you withdraw the funds.
• You can choose how the money is invested, giving you more control.
• Those aged 50 and over can contribute an extra $1,000 in catch-up contributions.
• Low contribution limits ($6,500 in 2023).
• There is a 10% penalty for most early withdrawals before age 59 ½.
Roth vs Traditional
Both 401(k) plans and IRAs come in two forms: Roth or traditional. A traditional account typically means contributions are tax-deductible and future withdrawals are taxed as ordinary income.
A Roth account essentially allows you to make qualified withdrawals down the road without paying tax on them, but all contributions now are made with post-tax income.
A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, ETFs. Some brokerage firms charge fees on the trades you make, while others offer free trading but send your orders to third parties to execute — a practice known as payment for order flow. Investors can be taxed on any realized gains.
You might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.
There are even a number of investment options out there not listed here — like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business.
Pros and Cons of Brokerage Accounts
There are benefits and drawbacks to brokerage accounts, such as:
• Offer flexibility to invest in a wide range of assets.
• Brokerage accounts provide the potential for growth, depending on your investments. However, all investments come with risks that include the potential for loss.
• You can contribute as much as you like to a brokerage account.
• You must pay taxes on your investment income and capital gains in the year they are received.
• Investments in brokerage accounts are not tax deductible.
• There is a risk that you could lose the money you invested.
Investing With SoFi
It might still seem overwhelming to figure out what kinds of investments will help you achieve your goals. There are different investment strategies and finding the right one can depend on where you are in your career, what your financial goals are and how far away retirement is.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
What is the most common investment type?
Stocks are one of the most common and well-known types of investments. A stock gives an investor fractional ownership of a public company in units known as shares.
How do I decide when to invest?
Some prime times to start investing include when you have a retirement fund at work that you can contribute to and that your employer may contribute matching funds to (up to a certain amount); you have an emergency fund of three to six months’ worth of money already set aside and you have additional money to invest for your future; there are financial goals you’re ready to save up for, such as buying a house, saving for your kids’ college funds, or investing for retirement. Please remember you need to consider your investment objectives and risk tolerance when deciding the “right” time to start investing.
Should I use multiple investment types?
Yes. It’s wise to diversify your portfolio. That way, you’ll have different types of assets which will increase the chances that some of them will do well even when others don’t. This will also help reduce your risk of losing money on one single type of investment. In short, having a diverse mix of assets helps you balance risk with return. However, diversification does not eliminate all risk.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.