What Are the Different Types of Investments?

Investing can help you turn your money into a source of hope and opportunity by generating financial returns over time. There are multiple types of investments out there, like stocks, bonds, and funds, plus many alternative investments. Choosing the right ones for you may seem complicated at first, but you’ll soon find that each option comes with unique characteristics, opportunities, and risks that help you narrow down what makes the most sense for your financial goals, risk tolerance, and investing style. Whether you’re looking to expand the types of investments in your portfolio or you’re dipping your toes into the market for the first time, this guide to common investment types will give you a solid lay of the land.

Here’s what we’ll cover:

• Types of investment accounts
• Common types of investments
• Diversifying your investments

Types of investment accounts

First things first: if you’re going to start investing, you need an investment account. When people talk about investing, they often think of buying stocks through a brokerage account. But there are a few other account types to consider depending on your investment objectives, and you might want more than one variety. Each type of investment account has different rules, tax consequences, limitations, and guidelines about the kind of investments you can make. 

• Brokerage accounts: A brokerage account is a taxable investment account used to buy and sell stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other types of investments. You have tremendous flexibility with this type of account; you can purchase any investment type the brokerage offers, with no limits on how much money you can invest.
• Tax-advantaged retirement accounts: If you’re saving for retirement, you can benefit from tax-advantaged accounts like IRAs and 401(k)s. Your money can grow either tax-free or tax-deferred, depending on the type of retirement account you choose. These accounts come with a number of restrictions on how much you can invest, when you can make withdrawals, and the types of investments you can make.
• Education accounts: Investment accounts for education are designed to save specifically for your beneficiary’s future qualified higher education expenses, like tuition, fees, or room and board. You’ll enjoy tax benefits with these accounts, but there are strict limitations on how the money can be invested and used. 
• Health savings accounts: If you’re enrolled in a high-deductible health plan, you may be able to take advantage of a health savings account (HSA). You can set aside money in an HSA on a pre-tax basis to pay for qualified medical expenses like deductibles, copayments, and coinsurance. While the money is in the account, you can invest it just as you would in a brokerage account.

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Common types of investments

Different types of investments, also known as asset classes, have specific characteristics in how they function and their level of risk. Most investors hold a variety of asset classes, and each can play a role in your portfolio to support your overall investment objectives.

Stocks

Purchasing stock means buying a small piece of ownership, or a share, in a company. Stocks are bought and sold on stock exchanges. Generally speaking, stock prices rise and fall based on investor demand. Most of the time, the more people who want to purchase a particular stock, the higher the price is likely to be. When fewer people want that stock, the price may drop. You earn money from stocks when the share price rises and you sell your shares for more than you paid for them. 

You can also potentially make money on stocks through dividends, which are periodic distributions of revenue that a company makes to shareholders. Not all stocks pay dividends, but those that do can provide a source of steady, passive income to investors. And if you own preferred stock, you get higher priority for dividend payouts. 

Stocks are generally considered more of a high-risk investment than other asset classes because prices can be volatile, meaning they may rise and fall quickly. Even dependable, highly stable blue chip stocks can come with as much risk as growth investments in up-and-coming stocks. That said, stocks may also produce higher returns than investments like bonds.

Bonds

Bonds are interest-bearing securities issued by companies or governments. Investors purchase government bonds, treasury bonds, or corporate bonds for a set amount of time, known as a bond term. Bonds are a form of debt that the issuer takes out, similar to a loan. In exchange for this loan, the company or government promises to pay you the original amount of the loan plus interest when the term is up. Generally speaking, bonds are considered a less risky investment than stocks, but they tend to have lower returns. You can invest in bonds through an investment account or purchase them directly from the issuer. 

Mutual funds

Mutual funds are baskets of investments chosen by fund managers. When you buy a share in a mutual fund, you buy a share of the portfolio, which means you’re buying a fraction of a share from each of the securities that the fund holds. Mutual funds may hold multiple types of investments or a variety of securities within one asset class, like stocks in multiple industries or sectors. That provides some built-in diversity, making the fund overall somewhat less volatile than individual stocks, which is why mutual funds are considered less risky than investing in stocks directly. Additionally, mutual funds are usually actively managed, which may be appealing to newer investors.

Exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) are similar to mutual funds in a couple of ways. Both hold a basket of investments, and owning a share equates to owning a fraction of a share of each of the securities the fund holds, like various stocks and bonds. This gives these investment funds some inherent diversity. The main difference between ETFs and mutual funds is that ETFs trade on exchanges all day long, just like individual stocks, while mutual fund trades are executed only at the end of each trading day. As a result, the price of a share in an ETF can fluctuate throughout the day based on stock market demand. ETFs are also more likely to be passively managed, which usually means lower fees.

Index funds

Index funds are a type of mutual fund or ETF that aims to match the performance of a major stock or bond index, such as the S&P 500, the Dow Jones Industrial Average, or the Bloomberg Barclays Aggregate Bond Index. These market indexes represent a hypothetical portfolio of holdings in a segment of the financial market, and the calculation of the index value comes from the prices of the underlying holdings. While stock index funds are the most common, there are several other types of index funds, including bond funds, broad market funds, equity funds, and balanced funds. Index funds are passively managed, so buying shares of these funds tends to have lower costs than actively managed mutual funds or ETFs.

Stock options

Stock options, also called equity options, are an investment vehicle that gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and timeframe. Options are considered derivatives because they are derived, or created, from an underlying asset. They are relatively complex financial instruments that come in two basic forms: puts and calls. Put options afford the holder the right to sell an asset at a stated price within a specific timeframe. Call options afford the holder the right to buy an asset at a stated price within a specific timeframe. Options require you to make predictions about several complex aspects of the market, and they can open you up to a variety of additional risks compared to stocks. 

Physical investments

Your investment strategy may include acquiring commodities you can actually see and touch, like gold, precious metals, or real estate. While these types of investments often require you to own something physical, you can also invest in funds and trusts that hold commodities, such as a real estate investment trust (REIT). Physical assets may offer relatively low, but stable returns. However, the degree of risk varies quite a bit according to asset type and market conditions. 

Alternative investments

An alternative investment is any investment vehicle that does not fall into one of the more traditional investment categories. The term is a catch-all that includes things like private equity investments, hedge funds, venture capital, managed futures, some real estate, art and antiques, and more. These investments are generally exclusive and unavailable to the average retail investor. Because of their complexity, lack of regulation, and high degree of risk, most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals.

Diversifying your investments

All types of investments come with risk. But there’s also potential for higher reward compared with other ways to grow your money, like earning interest in a cash investment, such as an FDIC-insured savings account. A well-managed investment strategy can earn higher returns that outpace inflation; if you’re investing for the long term, that means your money is less likely to lose buying power over time.

One of the most effective ways to reduce investing risk is to diversify your portfolio by spreading your money across different types of investments to avoid putting all your eggs in one basket. That way, losses in one asset class or sector of the stock market are likely to be balanced by stability or growth in other types of investments you hold. For instance, you might balance higher-risk investments like stocks with more predictable assets like bonds. Many investors rely on mutual funds, ETFs, and/or index funds as well, but be aware that the level of diversity built into funds varies depending on the assets held by any particular fund.

Choosing the right types of investments for your needs

Building a portfolio that works for you involves determining your financial goals, understanding your risk profile, and considering how the risks and rewards fit into your overall financial planning. As you begin to choose the types of investments you want in your portfolio, remember that diversification can help you mitigate risk, especially when you learn to balance high-risk investments with more stable, reliable assets. And if you invest with Stash, you’ll gain access to personalized guidance and Smart Portfolios that help you align your investing decisions with your long-term aspirations. 

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Frequently asked questions (FAQ) about types of investments

What are the six different types of investments?

There are actually a plethora of investment options out there, all of which carry different risks and potential for returns. Six types that investors often encounter are stocks, bonds, mutual funds, ETFs, index funds, and stock options. 

What are the four most common types of investments?

For the average investor, stocks, bonds, mutual funds, and ETFs are the most common types of investments. You can invest in these asset classes through both brokerage accounts and retirement accounts, and some brokerages offer fractional shares, making them accessible to a wide variety of people. 

Which investment gives the highest returns?

There’s no guarantee that any particular investment will produce higher returns than another. That said, stocks are generally considered to have higher potential returns than bonds. Some investors also see actively managed funds, like mutual funds, as likely to have higher returns than passively managed funds, but the increased fees may eat into profits. 

What are the three major types of investment styles?

Your investing style is often determined by your risk profile, which is how much tolerance you have for risk when investing. Risk profiles are usually classified as conservative, moderate, or aggressive. A conservative investment style prioritizes stability, even if that means lower returns. People with an aggressive investment style are more likely to take bigger risks in the short term in the hopes of higher long-term gains. A moderate type of investment style aims to strike a balance between risking short-term losses without sacrificing too much stability.