Types of Investments
Before you can invest, you need to understand what you're actually buying. Here are the main types of investments you'll encounter.
Stocks
Stocks are a means of owning a small part of a public company. When you buy a share of Apple stock, you literally own a tiny piece of Apple Inc.
- Potential return: High (historically 7-10% average annually)
- Risk: High (individual stocks can lose significant value)
- Best for: Long-term growth
The value of a stock is determined by what people are willing to pay for it, which is influenced by the company's earnings, growth potential, and market sentiment.
Bonds
Bonds are investment instruments that represent a loan. When you buy a bond, you're lending money to a government or corporation in exchange for regular interest payments.
- Potential return: Lower (typically 2-5%)
- Risk: Lower (more stable than stocks)
- Best for: Stability, income, balancing a portfolio
For the purposes of this introduction, think of bonds as the "boring but safe" part of your portfolio.
Mutual Funds
Mutual Funds allow you to invest in a collection of investments all at once, without having to own each one individually.
- A mutual fund might hold 500 different stocks
- Professional managers decide what to buy and sell
- You pay fees for this management (expense ratio)
This diversification reduces risk—if one company does poorly, it doesn't tank your entire investment.
Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds but trade like stocks on an exchange.
- Index ETFs track a market index (like the S&P 500)
- Usually have lower fees than mutual funds
- Can be bought and sold throughout the trading day
See how different investment types compare in terms of risk and potential return.
What Should You Invest In?
For most beginners, the answer is simple: low-cost index funds or ETFs.
The easy answer: A total stock market index fund (like VTI or FXAIX) gives you exposure to thousands of companies for a tiny fee. You don't need to pick individual stocks or time the market.
Why Index Funds?
- Diversification — Own thousands of stocks at once
- Low fees — Often under 0.1% annually
- Simplicity — No research or stock-picking required
- Performance — Most actively managed funds fail to beat index funds over time
| Investment Type | Typical Annual Fee | Complexity |
|---|---|---|
| Individual Stocks | $0 (just trading fees) | High |
| Actively Managed Mutual Fund | 0.5-1.5% | Medium |
| Index Fund / ETF | 0.03-0.2% | Low |
The Bottom Line
Don't overcomplicate this. For most people, a simple portfolio of low-cost index funds is all you need. As you learn more and your wealth grows, you can explore other options—but simple investing works.