Do you have extra cash that you’d like to put to work for you—but aren’t sure what to do with it? There are several investment options that can help your money grow over time. Deciding which to choose comes down to your risk tolerance, financial goals, and other factors.
One of the best ways to start investing your money for the future is to open an individual retirement account (IRA) or invest in your employer’s 401(k) plan. These retirement accounts help you plan for the long term by offering investment options like those noted below. If your retirement account is already in motion and you’re contributing to it regularly, consider the investments below as a way to help build up that nest egg.
1. Stocks
When you purchase a share of stock, you get a percentage of ownership in a publicly-traded company. While this investment strategy isn’t without risk, you can earn generous returns on your money if you buy shares when the price is low and sell when they increase.
Assume you buy 20 shares of stock in a company for $10 each, and the share price later increases to $20. The value of your investment will jump from $200 to $400. That $200 increase in value is called the return on your investment.
The value of a stock is determined by market factors and the company’s financial performance, which isn’t always easy to predict. So, it’s best to do extensive research on the stocks you’re considering before investing your hard-earned money.
Work with a reputable financial advisor if you need additional guidance. Confirm the advisor is licensed to do business in your state. They should also be registered with the Securities and Exchange Commission (SEC). Use the North American Securities Administrators Association’s website to check your investment adviser’s background.
If you can’t afford to pay for a financial advisor, you can still open a brokerage account with many investment firms, such as Charles Schwab, TD Ameritrade, and Fidelity, and invest on your own. Going it alone may cost you less in the short term—but could end up being expensive if you invest a lot of money without doing thorough research. And even then, investing in individual stocks still involves significant risk.
2. Mutual Funds and Exchange-Traded Funds (ETFs)
Mutual funds and ETFs are investment vehicles that allow you to diversify your holdings and minimize risk. However, there are key differences between the two.
Mutual funds are professionally managed portfolios that consist of various assets, such as stocks, bonds, and other securities. When you purchase shares, you’ll own a percentage of the fund. Because mutual funds are made up of many different stocks and securities, you assume a lower level of risk than you’d get by investing in shares of a single company’s stock. You can also invest in an index fund, which is a mutual fund linked to a market index (such as the S&P 500). Trades are allowed at the end of the day once the price is set.
ETFs are passively managed and typically track a market index. These funds are more flexible than mutual funds, as they can be traded at any time of the day. You may also find that administrative costs are lower than what you’d find with mutual funds. Consider trading fees before investing in an ETF.
3. Real Estate
Real estate is another long-term investment, and one that can do much more than grow in value over time—it can also provide you a place to live. Buying a single-family home to live in may allow you to make money if its value increases over time and you decide to sell. Purchasing a second property, such as a condo or multi-family property, can generate rental income. In either case, extensively research the markets you’re considering and work with a reputable realtor. While there are no guarantees that your property will grow in value, doing the necessary legwork before you purchase will improve your odds.
Aside from purchasing a property, investing in a real estate investment trust (REIT) or companies that own and manage income-producing properties is another option to consider. You can purchase shares of publicly-traded REITs through brokerages.
4. Bonds
Bonds are loans that investors make to government entities or corporations. In exchange, the entity agrees to repay you the principal and accumulated interest at a later date. They appeal to new investors or those who are nearing retirement and prefer an investment with minimal risk. Your money won’t have the opportunity to grow as fast or as much with bonds as with other investments mentioned here, but they tend to be safe investments that will produce a return over time.
The Bottom Line
Long-term investments can help you secure your financial future—but take their risks into consideration when deciding where to put your cash. Before you make any decisions, do your homework and seek advice from a financial advisor if you need additional guidance.
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Allison Martin is a Certified Financial Education Instructor (CFEI), syndicated financial writer, and author. Her work has been featured in The Wall Street Journal, ABC, MSN Money, Yahoo! Finance, Fox Business, Credit.com, MoneyTalksNews, Investopedia, The Simple Dollar, and a host of other reputable publications. She also teaches the essentials of personal finance through seminars and workshops.