It’s impossible to miss the fact that stocks, real estate and bonds all make for decent investments (at least most of the time). But there are so many different investment options, most of which get minimal marketing. If you want to take a look at a wider variety of options, you should be able to at least tell an American Depository Receipt apart from a Convertible Security. There are about twenty investments that any investor should at least be familiar with and the ten listed below are the first half of that list.
1. American Depository Receipt (ADR)
ADRs are traded on U.S. stock markets just like regular stocks, but they actually represent shares in foreign corporations. An ADR is issued by a U.S.-based bank or brokerage, which buys a large number of shares from a company based outside the U.S. Those shares are bundled into groups and then resold; they are usually labeled with a ratio representing how many shares a particular ADR represents. The sponsoring bank collects detailed financial information about any company whose shares it resells. ADRs are a relatively simple way to invest in foreign companies and avoid the administrative and duty costs of international transactions. Other countries besides the U.S. have depository receipt opportunities available.
Annuities provide set payments at regular intervals to their owners. You can typically purchase an annuity through an insurance company, and you’ll have several options. An annuity can either be immediate or deferred: with a deferred annuity, you will not begin receiving payments for a certain period of time. Deferred annuities are often contracted for life — they’re set up so that as long as you live, the insurance company will send you a check at a regular interval. Annuities are also either fixed (the payments are set) or variable (there is a guaranteed minimum payment, as well as payments based on the performance of an annuity investment portfolio.
3. Closed-End Investment Fund
A closed-end fund issues shares that are traded just like stocks but are actually closer to mutual funds in the way the are managed. Closed-end funds hold portfolios of securities — usually securities that meet very specific criteria (i.e. come from particular industries). These fund are actively managed and may hold a few investments in stocks or bonds in order to diversify, but because of their focus on particular sectors, closed-end fund issues are not considered diverse. Some closed-end funds offer dividends.
Collectibles can be pretty much any physical asset with a value that increases over time. While most people consider fine art, stamps and similar purchases to be collectibles, there is no strict definition that includes or excludes a particular asset. The greatest drawback to collectibles is the fact that collectibles offer no income, unlike many other investments. However, a collectible’s appreciating value often outpaces inflation.
5. Common Stock
Common stock is what most of us think of when we hear the word stock: a share of ownership in a particular company. It entitles you to a portion of the company’s profits as well as voting rights. The majority of stocks traded today are common stocks. While the benefits associated with owning stock can be great, it is a relatively risky investment. If a company that you own stock in goes bankrupt, as a common shareholder, you won’t receive money until the creditors, bondholders and preferred shareholders have all been paid off.
6. Convertible Security
Convertible securities are either preferred stock convertibles or convertible bonds. While you would purchase a convertible bond just as you would purchase a normal bond, you would have the opportunity to convert it into common stock in the company that issued it. Depending on the terms of the convertible bond, also known as the indenture, the bond could convert into a significant number of shares. Convertible bonds do provide a small amount of income, but the real value is that the bond can be converted into common stock.
7. Corporate Bond
Corporations issue bonds in order to raise money: when you buy a corporate bond, you’re essentially loaning a corporation money for the length of the bond. Not only will the corporation repay you the full face value of the bond (and your loan) but it will also pay you a coupon — a predetermined interest rate paid out every six months. Corporate bonds are more lucrative than government bonds, but they are also riskier.
8. Futures Contract
A futures contract is a commitment to either deliver or receive a specific quantity of a commodity during a specific month at a specific price. Most futures contract are closed out before the expected delivery date and while they can be very risky, futures contracts can also provide for a simple way to manage price risks. They can provide impressive profits, due to their higher risk factors.
9. Life Insurance
While life insurance may not seem like an investment on the surface, it provides a return on your monthly payments. No matter how long you may have been paying for a life insurance polity, its value is set. It’s a relatively low-risk investment because insurance is heavily regulated by the government.
10. The Money Market
Through the money market, you can buy fixed-income securities, primarily short-term securities that last less than a year. Unless you are able to deal in the very high denominations that most money market securities are sold in, you will likely have to purchase these securities through a money market mutual fund or bank account. Returns on money market investments are highly dependent on the current interest rate and are considered low risk.
Check back on Thursday for the other ten investments that you should know.