What comes to mind when you hear “investing”? For many people, it’s likely investments such as stocks and bonds. But these aren’t the only components of a well-diversified portfolio. Even if you don’t include every type of investment in your portfolio, understanding what they are, how they work, and their associated benefits and risks could help you make informed investing decisions. Here’s what you could invest in.
Types of investments
According to the Financial Industry Regulatory Authority (FINRA), there are 11 different types of investments.
1. Stocks
A stock represents partial ownership in a company. Investors potentially make money from stocks through periodic dividend payments (portions of company profits paid out to shareholders) and share appreciation, when an investor sells shares for more than they paid for them.
Pros:
- Because stock prices are tied to the company’s performance, the potential profit from investing in stocks could exceed more conservative investments, such as bonds and cash equivalents like certificates of deposit (CDs).
- Dividends may provide a passive income stream.
- Shareholders may be able to vote to influence company decisions.
Cons:
- While stocks could be rewarding, they’re also considered riskier. Prices can be affected by the company’s financial performance, broad economic trends, geopolitical events and government policies, and more.
- Companies may eliminate or reduce dividends at any time.
Potentially good for people who: believe in a company’s (or group of companies’) growth potential, have a longer investment horizon, and can tolerate the volatility that may come with stock investments.
How to buy: in investment accounts from a brokerage firm, including brokerage accounts, retirement accounts, and health savings accounts, among others.
Related: How to invest in stocks
2. Bonds
A bond is like a loan an investor (bondholder) makes to a borrower (bond issuer). Bondholders receive periodic interest payments from the bond issuer, based on the bond’s coupon rate, or annual interest rate. Common types of bonds include:
- Treasurys, issued by the US federal government
- Agency bonds, issued by US federal agencies or government-sponsored enterprises (federally chartered corporations publicly owned by stockholders)
- Municipal bonds, aka muni bonds, issued by state and local governments
- Corporate bonds, issued by corporations
- High-yield aka junk bonds, issued by companies with sub-investment grade credit ratings
Pros:
- Bonds come with a promise to be paid back with interest, so they’re often considered less risky than stocks.
- Interest payments are generally reliable.
- Bonds could help diversify a portfolio that also consists of more volatile investments, as the interest rate is set and returns aren’t dependent on the issuer’s performance.
- With muni bonds, you generally don’t have to pay federal taxes on the interest earned.
Cons:
- The return is generally limited to the rate granted at purchase, and to get the full return, you can’t cash out the bond until maturity.
- If interest rates increase, the price of issued bonds will go down (given the lower fixed rate), and vice versa (interest rate risk).
- It’s possible that the bond issuer could default and not return your money, especially on higher-yield bonds.
- Some bonds are callable, meaning the issuer could recall the bond before its maturity date, stopping interest payments.
- Interest income on most bonds tends to be taxed at ordinary income tax rates.
Potentially good for people who: are more risk-averse, are building a diversified portfolio, and/or want to support particular bond issuers.
How to buy: in investment accounts from a brokerage firm, like brokerage and retirement accounts. However, workplace retirement accounts may limit available options. In addition to individual bonds, investors can buy bonds in exchange-traded funds (ETFs) and mutual funds. Treasurys can be purchased from the US Treasury or through Fidelity.
Related: How to buy bonds
3. Exchange-traded funds (ETFs)
An ETF is an investable fund, containing many investments, such as stocks or bonds. ETFs are generally organized around a theme, strategy, or exposure, like tracking the performance of an index, such as the S&P 500®1 or Nasdaq composite,2 which are each groups of large publicly traded companies. Approximately half of ETFs today are actively managed, meaning the fund manager actively selects and trades portfolio securities with the goal of outperforming a specific market benchmark or index. ETFs trade on an exchange like a stock, so the share price could change throughout the day.
Pros:
- ETFs usually come with some level of built-in diversification because each share represents a collection of assets. This helps to lower risk, as compared to individual stocks.
- ETFs generally charge lower fees than a similar type of investment fund called a mutual fund. (Read on to learn more about mutual funds.)
- ETFs tend to be more tax-efficient than mutual funds.
Cons:
- As with any pooled investment vehicle, ETFs usually charge a management fee, vs. simply buying an individual stock.
- Investors may have to pay a bid/ask spread, which is the difference between what the buyer pays and what the seller receives at the time of sale, which may be higher or lower than the net asset value (NAV) per share of the fund.
Potentially good for people who: want a diversified investment with potential tax efficiencies.
How to buy: in investment accounts from a brokerage firm, like brokerage and retirement accounts, though workplace plan administrators might limit available options.
Related: Benefits of ETFs
4. Mutual funds
A mutual fund is a collection of assets bought with pooled investor money. Like an ETF, the fund’s components are generally centered on a goal or strategy, such as outperforming or mimicking the performance of an index, like the S&P 500. But they trade differently and have different tax rules than ETFs.
Pros:
- Because even a single share of a mutual fund includes many different assets, it offers some level of built-in diversification.
- As a result of that diversification, mutual funds tend to be less risky than individual stocks that are tied to a single company’s performance.
- Some funds (like certain index funds at Fidelity) don’t require a minimum investment.
- Some pay dividends and/or capital gains distributions (when your fund sells assets that have made their own gains), which could be automatically reinvested.
- Single fund strategies such as target date funds or target allocation funds can provide diversified solutions for specific goals like retirement, or achieving a specific level of risk.
Cons:
- Typically, a finance professional chooses the assets in the fund (or replicates an index) and monitors the overall performance. That service often comes with management fees. There could even be transaction fees, though Fidelity funds can be bought or sold through Fidelity without transaction fees.
- Mutual fund fees tend to be higher than ETF fees.
- Some funds require minimums to invest.
- You may need to pay capital gains taxes when the fund manager sells securities within the fund, even if you don’t sell your mutual fund shares.
- Mutual funds trade only once a day, usually at the end of the day.
Potentially good for people who: want to spread out their risk without buying many different types of investments and investment management to the fund’s investment objective and are willing to pay a fee.
How to buy: directly from mutual fund companies or in investment accounts from a brokerage firm, like brokerage and retirement accounts, though workplace plan administrators might limit available options. Mutual funds are not available on exchanges, such as the New York Stock Exchange.
Related: How to pick a mutual fund
5. Bank products
Bank products are short-term investments that may earn interest, including certificates of deposit (CD).
Pros:
- Generally less risky than other types of investments because you have a guaranteed rate of return.
- Some products are Federal Deposit Insurance Corporation (FDIC)-insured up to $250,000 per depositor, per ownership category, per insured institution. So if your bank fails, your money—up to the limit—should be returned to you.
Cons:
- Typically offer lower returns than other types of investments that may have more risk.
- May limit access to your money for periods of time unless you pay a penalty.
- Your money doesn’t go as far if the inflation rate is higher than the interest rate.
- If you spread money around to multiple institutions to expand FDIC coverage, keeping track of accounts might be challenging.
- There may be penalties incurred if you redeem a product like a CD before its full term.
Potentially good for people who: are risk-averse or willing to tie up money for a set period of time for a guaranteed interest rate, as with CDs.
How to open or buy: at online or brick-and-mortar banks, credit unions, and insurance companies. Some types may be available at a broker-dealer. For example, Fidelity offers brokered CDs.
6. Digital assets
Cryptocurrency is a digital currency, meaning it runs on a virtual network and doesn't exist in physical form like paper money or coins. Cryptocurrencies are often built using blockchain technology, which provides a secure record-keeping and processing system for all of their transactions.
Cryptocurrency can be held in a crypto wallet or in a hot wallet through a crypto trading platform account. Digital assets encompass cryptocurrencies like Bitcoin and Ethereum, but also stablecoins, which peg their value to the US dollar, and non-fungible tokens (NFTs), which are one-of-a-kind digital pieces, like artwork.
Pros:
- There’s potential for high returns.
- You could trade crypto without a traditional bank—you just need internet access and a crypto wallet.
- Crypto trading can come with lower fees and faster transfer times than traditional bank transactions.
- There’s transparency because every transaction is publicly viewable and can’t be changed.
Cons:
- Digital assets are highly volatile. Prices change quickly and steeply because many factors influence crypto prices.
- There’s a significant risk of losing a portion or your entire investment.
- Due to cryptocurrencies’ independence from companies and countries, there are limited investor protections.
- Some platforms are more secure than others, and some newer crypto coins could carry a higher scam risk than those more established.
Potentially good for people who: can accept the risk and volatility and want to own crypto as part of a broader portfolio.
How to buy: on investment platforms, crypto exchanges, some mobile payment services, and alternative platforms.
Related: Ways to invest in crypto
7. Options
An option is a legal contract that gives the contract buyer the right to either buy or sell an asset at a specified price for a certain period of time. Whether or not an investor makes money by purchasing an option depends on the price of the asset relative to its market value at the time it’s bought or sold. Options can be purchased for different asset types, including stocks, ETFs, and indexes.
Pros:
- Because you invest less capital in a derivative of the underlying asset, you can potentially earn a higher rate of return compared to investing directly in that asset.
- Options can also be used to hedge investments to reduce risk. For instance, you could buy a contract for the right, but not the obligation, to sell a stock that’s dropping in value at a given price, within a specified period, to reduce further losses.
Cons:
- Options are more complex investments than stocks and other assets. It’s important to educate yourself on options before considering investing in them. Options may not make sense for buy-and-hold investors who plan to hold for multiple years, because options have contract expirations and generally a shorter-term position.
- There’s a risk of significant losses, including the risk of losing your entire investment if your outlook for the underlying asset doesn’t come to pass.
Potentially good for people who: are advanced investors and are approved for trading options.
How to buy: through brokerage firms, though your brokerage account must have options trading approved.
8. Futures and commodities
A commodity is any raw material that’s consumed or used to create other products. Some commodities, like precious metals, could be held for future sale. For harder-to-store commodities, like wheat and lumber, investors could buy futures contracts: legal agreements to buy or sell a commodity at a predetermined price and quantity at a future date.
Pros:
- Commodities and futures are potential hedges against inflation. The value of a commodity or a futures contract could rise faster than the pace of rising prices in general.
- Some commodities, like gold, are considered “safe havens” in times of instability because their value tends to climb amidst uncertainty.
Cons:
- Commodities and their futures can experience high volatility.
- Buying physical metals requires storage space and insurance, which can lead to higher costs.
- Precious metals tend to have a higher tax rate than stocks.
Potentially good for people who: want to diversify their portfolio across a wide range of assets.
How to buy: Physical precious metals can be bought from individuals, jewelers, gold dealers, and some financial institutions. Commodity stocks, mutual funds, futures contracts, and exchange-traded products (ETPs) that track a commodity index can be bought through some accounts with a brokerage firm.
Related: How to buy gold
9. Insurance
FINRA considers life insurance products to be investments. Insurance companies sell policies that pay out to a beneficiary if you die, as long as you keep paying your premiums. Term life insurance covers you for a specific period of time, and the premiums stay level during the guarantee period. After the guarantee ends, your policy will stay in force, however your premiums will increase. There is no cash value to the policy, and it will only pay out the coverage amount if the insured individual dies while the policy is still in force. Permanent life insurance policies come with a cash value and fall under 2 subcategories: whole life and universal life. One of the major draws of universal life is flexible premium arrangements that may allow you to skip premiums as needed as long as your cash value is high enough to keep your policy in force.
Pros:
- Life insurance can help your beneficiaries pay expenses in the event that you die and they lose your income.
- Permanent life insurance could be used as a tax-advantaged investment vehicle, since policyholders don’t pay taxes until cashing out the policy.
- Permanent life insurance allows tax-free loans that charge interest using its cash value as collateral, though doing so may reduce the death benefit, and your policy may lapse if you fail to pay off your loan.
- Variable universal life policies allow you the option to invest your cash value into a set range of investment options, though as with all investing, there is risk of loss.
- Some whole life policies are eligible to earn dividends based on the insurance company’s earnings. You may be able to invest a portion of the premiums you pay in some investment types, and some life insurance types allow you to choose those investments from a set range of options.
Cons:
- Getting insured may require a physical exam. Your health could determine your eligibility and premium prices.
- Premiums could change over time, depending on your policy, which could make the cost unpredictable.
- Older people who buy life insurance for the first time generally pay higher premiums.
- Some policies earn interest, rather than allowing you to invest, which could offer lower returns.
Potentially good for people who: have a beneficiary who relies on their earnings or have significant wealth they wish to transfer to their beneficiaries.
How to buy: through life insurance companies and some brokerage firms (Fidelity offers term policies). Your employer may offer a group policy.
Related: Life insurance: Know the basics and how it can help manage risk
10. Income annuities
An income annuity is a contract with an insurance company where you exchange a lump sum of money for regular, recurring payments. These payments can last for as long as you live, or for a predetermined period. This arrangement transfers certain risks, namely the risk of outliving your savings (longevity risk) and the risk of investment losses (market risk), from you to the insurance company. In addition to income annuities, there are various types of annuities that can meet the diverse income needs of different investors.
Pros:
- Income annuities provide a guaranteed, predictable source of income that is not affected by market performance.
- Transfers the risk of running out of money (outliving your savings) to the insurance company.
Cons:
- Annuity guarantees are subject to the claims-paying ability of the issuing insurance company, so be sure you purchase from a reputable company.
- In order to provide an income stream, there is no or limited access to assets.
Potentially good for people who: want pension-like cash flow and the peace of mind of knowing they won’t outlive their savings in retirement.
How to buy: through an insurance company, bank, or brokerage firm. (Psst … Fidelity sells annuities.)
11. Alternative and emerging products
Alternative investments are financial securities that do not fall into traditional categories like stocks, bonds, and cash. They may offer diversification, income, and potentially higher returns but often come with unique risks and reduced liquidity. Types of alts are: private market, which are not listed on an exchange and include private equity, venture capital, private credit, and real estate; and liquid alts, alternative investment strategies offered in more liquid structures, such as mutual funds or ETFs, making them accessible to a broader range of investors. Examples include hedge fund replication strategies, managed futures, and long/short equity.
A broad range of investments fall under the alts umbrella, including:
- Real estate investment trusts (REITs), which are companies that own, operate, or finance apartment buildings, shopping centers, offices, data centers, and other kinds of properties.
- Liquid alternatives usually have the flexibility to take both long and short positions (seeking to benefit from declining asset values).
- Private assets such as private equity, real estate, or private credit, which may offer enhanced returns and/or diversification benefits but may be illiquid for long periods of time and may require you to be a qualified purchaser or accredited investor to invest.
Pros:
- Alts potentially offer higher returns than conventional investments.
- Alts can potentially help generate income.
- Investing in alts could help manage risk by helping improve diversification.
- Alternative assets could potentially experience less volatility.
Cons:
- Could carry significant risks exposure besides just traditional market risk.
- Private market alts are not listed on an exchange, thus may not be sold as easily as other investments, such as stocks or bonds. Limited liquidity is one of the most significant drawbacks, as investors may not have the ability to sell/redeem their investment for long periods of time.
- Alts can be more complex to understand than traditional investments.
- There could be high fees associated with investing in alts.
- Certain alternative investment strategies may be higher risk than traditional investments, which may lead to loss of principal.
Potentially good for people who: understand the complexities and meet qualifying criteria (like being an accredited investor with a certain earned income, net worth, or amount of investments).
How to buy: For qualified investors, some can be bought via a brokerage account.