About Different Ways of Investing Money

There are many different ways of investing money. Anywhere you put your cash that has the potential to produce a return can be considered an investment. The most obvious investments are bank accounts, stocks, bonds and mutual funds. However, investments also include things like real estate, precious metals and collectibles.

Type

The easiest way to invest money is to deposit it in your local bank. Banks offer checking accounts that sometime pay a small amount of interest, savings accounts that pay slightly more interest, money market accounts that pay interest that adjusts in relation to the prime rate and certificates of deposit that pay a set amount of interest for keeping you money in an account for a set period of time. The next level of investing is mutual funds. These can be purchased through a mutual fund company. Money is exchanged through the mail and over the Internet. Mutual fund companies sell shares in investments ranging from stocks to bonds to real estate to precious metals. There are different styles of mutual funds to suit every investor's needs. The most advanced form of investing involves individual stocks, bonds and other securities. These can be purchased through brokers. Other investments like your home, collectibles and precious metals may also generate profits over time.

The Facts

All investments involve risk. The riskier the investment, the more likely it will produce a greater long-term gain. The price of riskier investments like emerging market stocks can fluctuate dramatically. It is possible to lose much or all of your money in a high-risk investment. Lower-risk investments like certificates of deposit tend to earn less but pose less of a risk to the principle. The key to investing is weighing the relative risks and rewards. Most investors use a balanced approach. They invest a portion of their assets in low, medium and high-risk investments. By spreading your money around different types of investments, you minimize risk while maximizing growth potential.

Time Frame

Determining how much of your money to place in short-term, medium-term and long-term investments depends primarily on your time frame. Money that you will need to spend within the next year is short term and should be placed in the most conservative investments. These include checking accounts, bank savings accounts, money market accounts and short-term certificates of deposit. Medium-term money can be savings for emergencies, a car, a house down payment or a vacation. This is money that you may need in one to five years. Medium-term investments can be longer-term certificates of deposit, bonds and conservative mutual funds. The idea is to get your money to grow without a great risk to the principle. Long-term investments have time frames of decades. Investing for retirement or college educations fall into this category. Long-term investments can be higher-risk mutual funds or individual stocks. Investments in precious metals, real estate and collectibles don't fall into any specific time frame. Their values rise and fall unpredictably. They can be held for a short or long time depending on how fast they appreciate.

Benefits

The benefits of short-term investments are that they are easily accessible and have a very low risk of losing principle. Medium-term investments have the potential to produce a greater returns yet maintain an acceptable amount of risk. Long-term investments have the potential of significantly higher returns with risk spread out over many years. Long-term investments for retirement are often tax sheltered as an IRA or 401K. Savings for college educations are often tax sheltered as 529 plans. Real estate investments can be used by the investor while they appreciate. Precious metal investments hold their value during economic collapse. People who profit in collectibles tend to enjoy collecting. They generally do not mind holding their investment until it appreciates enough for them to sell.

Risk Factors

There are very few risk factors for checking accounts, savings accounts and money market accounts. Principle is guaranteed, and you can access your money whenever you want. The only drawback is that the interest rate is very low. You can't lose principle from a certificate of deposit, but you can lose interest you accumulated if you withdraw your money early. You can lose some or all of your money investing in stocks, bonds and mutual funds. These risks are mitigated by other factors. Conservative securities involve less risky investments but produce lower returns. Aggressive securities involve riskier investments but are usually held for longer periods of time, so investors can outlast bad markets.