What Can I Invest In?

You have taken all the steps to get started investing. You opened an investment account, transferred some money in, and now you are ready to invest. So…what can you actually invest in?

Here are the options open to the average retail investor:

Stocks (Equities)

Purchasing stock is literally purchasing a tiny fraction of a company. This is also known as purchasing equity in a company. Every stock has a value at which you can buy or sell the stock. Many, many investors buy and sell different stocks of different companies every day on what is known as the stock market.

When you buy a stock, you are betting on that stock increasing in value so you can sell it later at a higher price, earning the difference as a profit, or return. However, a stock is not guaranteed to go up in price. Stocks are often considered the riskiest investment category for the average investor, since a stock price could decrease for many reasons including economic headwinds, poor company performance, supply chain issues, etc.

The company could even go bankrupt and your stock would be worth nothing!

This is why many smart investors diversify their investments by investing in many different stocks of many different companies or they buy mutual funds or ETFs that track an index such as the S&P 500 (link to S&P), a sector such as renewable energy, or a specific investment strategy such as high-dividend paying stocks. 

Bonds (Fixed Income)

Unlike stocks, when you buy a bond, you are not buying ownership of that company. Instead, you are lending money to that company with the understanding that the company will pay you back what you lent them, with a little extra in interest. Companies are not actually the largest issuer of bonds, rather governments are. The US Government, States, and many cities issue bonds as well. 

Bonds are broken down into coupons and principal. Principal is the amount the company will pay you back when the bond matures, usually the principal is $100, $1,000, or $10,000. Coupons are little payments you receive from the bond issuer, annually, semi-annually, or sometimes more frequently. Not all bonds pay coupons, some just pay back their principal (these are called zero-coupon bonds). Bonds still do carry risk, as the company or government that you lent your money to could not have enough money to pay you back when your bond matures. This is called defaulting. Government bonds are usually considered safer since they have a robust and resilient revenue base in the taxes they collect from their citizens. 

When an entity issues a bond, the price that you pay for the bond could be less than, greater than, or equal to the principal value. The price of the bond is determined by the coupon rate, length to maturity, interest rates, and many other factors including default risk. A zero-coupon bond would likely be valued at much less than its principal, but a bond with a high coupon rate could be valued at more than its principal.

Cash (Money Market)

In the investment universe, holding “cash” does not actually mean keeping all your money in a briefcase under your bed. Instead, it refers to super short-term, ultra-safe investments known as the money market.

The money market is where corporations, banks, governments, and other financial players borrow and loan each other money for very short periods of time (anywhere from overnight to one year). As an individual investor, you can take part in the money market in many ways such as investing in a money market fund, opening a high-yield savings account, or buying a certificate of deposit at a bank.

Money markets have many advantages, they have little downside risk and can provide a consistent return. Unlike stocks, your principal value won't plunge during a market crash, and unlike long-term bonds, your money isn't locked away for years.

However, a key disadvantage is that cash offers the lowest potential return of the major asset classes. If the interest rate you are earning is lower than the rate of inflation, your money actually loses purchasing power over time.

Because of this, smart investors use money markets for purposes such as parking money they wish to spend soon or have on-hand in case of an emergency.

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