If you want to achieve the “American Dream,” at some point, you’re going to have to look into investment opportunities. Saving money is nice, but nobody’s ever created generational wealth by merely putting away money in their piggy banks. Of course, there’s risk involved with every investment opportunity, but as the saying goes, “No risk, no reward.”
Investing can be intimidating if you’ve never tried it and you don’t understand how investments and the markets work. It’s understandable not to want to invest your hard-earned finances in something with no guarantee, but that’s what capitalism is all about—to the victor goes the spoils, and so on. Continue reading to learn about some different types of investments and the pros and cons of each.
Investing 101
Investing is the act of buying an asset with the intent of selling the asset for more than you paid for it. There are numerous ways to invest, but the key to being a successful investor is finding the market and investment strategy that’s best for you. Among the most common types of investments are hedge funds, stocks, and bonds.
Of the three, the stock market is the most popular and the one you’re the most likely to hear economists talking about on cable news shows. The stock market is so popular that it’s all but synonymous with the United States economy.
1. Stocks
If you’ve ever seen the “Wolf of Wall Street,” you’ve seen the cinematic version of the glory days of Wall Street. It was all about slick hair, slicker talking, wheeling, and dealing, and hobnobbing with the wealthiest investors. If you want to earn money in the most dramatic fashion, trading stocks is the way to go, but it’s no Hollowood flick by a longshot.
The stock markets shift daily, and sometimes the shifts are so seismic that entire swaths of people can either become filthy rich or flat broke within minutes. That tendency to fluctuate, sometimes drastically, is known as market volatility, and the stock market is the most volatile of them all. However, don’t expect to hit it big overnight. Even in the stock market, patience is important.
A stock, in essence, is equity in a company. Anytime you buy a stock, it’s like you’re buying a portion of that company, and therefore, you get a piece of the company’s profits proportional to how many portions, or shares, of the company you own.
2. Hedge Funds and Other Unregistered Securities
If you’re someone with a high annual income, you may benefit more from investing in unregistered securities like hedge funds and other types of investment opportunities. You have to meet a certain net worth or income level to invest in unregistered securities because they require a large investment.
It’s normal for a hedge fund to require an investment of $100,000 or even $1 million for a natural person. A person who invests in a hedge fund or another type of unregistered security is called an accredited investor.
To protect investors from financial calamity, there are accredited investor requirements to ensure they can meet the wealth threshold to become accredited investors. The requirements are that you have an annual income of at least $200,000 or a net worth of $1 million for individuals. If filing joint income with your spouse, the annual income threshold is $300,000, but the net worth threshold remains the same.
3. Bonds
Any good investment adviser will tell investors that it’s important for them to diversify their investment portfolios. Even if you make a lot of money in private equity or on the stock market, you should still have some assets to act as an insurance policy against a catastrophe in the markets.
One of the surest ways to get a return on your investment is to buy bonds. A bond is a money product issued by the United States government to buyers. However, when you purchase a bond, you’re purchasing debt—meaning, you’re giving a loan to the U.S. government. The bond appreciates value with time until it reaches maturity, at which point you can cash it out and get the full value of the bond. However, if you cash the bond before it matures, you may end up forfeiting most of your return.
