5 Common Types of Investments and How They Work


The thought of investing is frightening to many; partially due to the number of intricacies involved. See, one doesn’t need to have a degree on investing strategies, all it takes is a critical eye for the market and assessing opportunities and risks beforehand.

In this blog, we will explain some of the most common types of investments and how to approach them – however, take all precautions necessary before making any investment and ideally seek the help of a financial advisor.

Stocks

Pretty sure that we’ve heard this term in our lives plenty of times, and how people either make a fortune investing in stocks or come crashing down. So, what are stocks and how are they traded? In layman terms, stocks refer to portions of a company’s ownership. So, in essence, when you’re buying stock, you’re purchasing part ownership in a public company.

Upon the purchase a stock, you will be entitled to receive dividend or incur loss based on the company’s performance during its financial year. Brokers sell stocks to investors and charge a fee for their services.

Mutual Funds

As an integral part of the investment strategy spectrum, mutual funds pool money from different investors and invested in companies belonging to a variety of industries. In actively managed mutual funds, a hedge manager uses his expertise to allocate investments to suitable companies.

While in passively managed mutual funds, you keep track of major stock market movements to make a move. Because mutual funds are fundamentally diversified, the risk is always less.

Exchange Traded Funds (ETF)

Exchange Traded Funds are in principal similar to mutual funds. The only difference is that you purchase and sell them on the stock markets. For newbies, we highly recommend ETFs; as they are highly diversified.

ETF involves gathering securities (stocks) that follows a hypothetical market portfolio (index) – such as S&P 500. As opposed to mutual funds that you can trade once a day, Exchange Traded Funds share prices change all day as they are purchased and sold.

One of ETFs major benefits is you pay less broker commission than buying stocks individually as a result of low expense rations. So, generally ETFs and Mutual Funds are great starting points for those new to investing.

Retirement Plans

One of the most common types of investments out there, retirement plans enable investors to invest money in the present to reap returns in the future when they hang up their professional boots.

Retirement plans aren’t a distinct stream of investment, but a vehicle for making investments, and can include buying stocks, bonds, gold etc. Perhaps the biggest USP of retirement plans is you won’t have to pay taxes on your money till the time you withdraw it.

Certificates of Deposit

Certificate of Deposit or CD is an extremely low-risk form of investment. Basically, you hand bank a certain amount of money for a pre-determined period of time. When that time period ends, you receive your principal amount back as well as a percentage of profit or interest.

Simply put, they are low risk, low reward type of investment. Even if the bank were to go bankrupt, you will still get your money back. Just make sure you don’t withdraw the money before the CD time period or you might incur penalties.

To gain more insights, get in touch with our investment managers here or call us at +971 4337 2000

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