So, you’re investing in stocks — good for you! Investing is the best way to build wealth. Saving your money in a savings account will only net a percentage point or so in interest, but smart investing can see your money grow by 10 percent or more year over year.
But stocks aren’t the only investments that you can use to build wealth. Here are a few other forms of investment that you need to know about. Advanced investors will use any and all of the investment opportunities at their disposal to make strategic bets on companies, industries, and markets. You should, too!
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Mutual funds
Mutual funds are collections of investments under the umbrella of one “fund.” Investors can buy into mutual funds for as much or as little as they’d like. Mutual funds are bought and sold once per day, after the markets close.
So what’s in a mutual fund? Anything the fund manager wants. Some are index funds, which track market indices like the S&P 500. Others are actively managed funds that are marketed on the reputation of their hotshot manager. Mutual funds can be good ways to diversify at a discount (it’s a lot easier to buy into an S&P 500 fund than it is to buy all of the individual S&P 500 stocks) or to hitch yourself to the right rising star in finance.
Exchange-traded funds
Exchange-traded funds are similar to mutual funds in that they are not individual stocks, but rather collections of investments. Exchange-traded funds, or ETFs, are different from mutual funds in the way that their name implies. They are traded on exchanges, just like stocks. They can be bought and sold during market hours, not just once a day like mutual funds. And they have a specific price — you buy some number of them, rather than buying in at a certain dollar amount.
Traditionally, ETFs have often been passively managed (that is, by an algorithm) rather than actively managed (by a fund manager) more often than their mutual fund counterparts — but this distinction has eroded quite a bit, so don’t let outdated ideas about mutual funds and ETFs confuse you. Plenty of passively managed mutual funds and actively managed ETFs are out there.
Bonds
Bonds are often mentioned in the same breath as stocks, but the two are very different things. Bonds are essentially shares of company or government debt. When an organization needs money, it can issue bonds, which are bought for a certain amount and then “mature” to a larger amount that will be paid by the organization later on. You can think of bonds as being something like crowdsourced loans.
Bonds are often safer alternatives to stocks, but not always. Bonds are risky because the organizations that issue them can default. The safer the bond, the lower the interest rate tends to be. And bonds that are near maturation are “safer” than long-term bonds, because there’s less time for things to go wrong. Depending on the bond or bond fund, bonds can be very safe or very risky.
The big and small picture
With so many different ways to invest, investors can take all kinds of positions on all kinds of things — from individual companies to entire industries and even the market as a whole.
As you learn more about investing, you may find that it makes sense to focus on a particular specialty. Take the crude oil business, for instance. Crude oil trading is possible through all sorts of means. You could trade on the fortunes of particular companies, for instance, or invest in funds that track crude oil indices. You could even play currency markets with an eye toward oil-centric economies. The most popular way to trade in crude oil is probably the United States Oil Fund, but you have lots of options — including stock options, futures, and more!
Ultimately, going beyond stocks isn’t just about trying out new investment vehicles. It’s also about making the most of those vehicles, as well as regular old stocks, by learning more about how industries and entire markets work.