Types of Investments and How To Make The Most of Them

According to a 2024 report by the Federal Reserve, 35 percent of Americans have some kind of investment outside of their retirement account. Investing is one of the most powerful ways of compounding and growing your money over time—so it’s no wonder it’s a part of so many people’s financial plans.

But when you’re just getting started, understanding all the lingo and investment options can feel overwhelming. Below, we break down some of the words you’re likely to hear and take a look at some common types of investments, so you can feel more confident getting started.

What is an investment?

An investment is any asset that you purchase with the intention of generating a return on your money. That return can come in the form of income, an increase in value when you sell the asset in the future, or a mix of both.

Anything with the potential to increase in value over time— a physical object, financial tool or digital asset—can be considered an investment.

What is an investment portfolio?

An investment portfolio is simply a collection of assets or investments. In other words, your portfolio can be thought of as the collection of every single investment asset you own. While one stock might be considered an investment, a portfolio might contain a variety of different kinds of stocks. Or it might contain stocks in addition to other types of investments.

It’s also important to note that you could hold your entire investment portfolio in a single account, such as a single 401(k), or your portfolio can be made of multiple investment accounts—perhaps a 401(k), an individual retirement account (IRA), a brokerage account, savings account and more.

What are some different types of investments?

You may hear people talking about investing in things like wine, art or other assets. But typically, when you’re looking to grow your money for future goals, you start by looking at more traditional investments like stocks, bonds and mutual funds.

Traditional investments include the following:

Stocks

A stock is a financial instrument that represents partial ownership of a company. When you purchase shares of a company’s stock, you are becoming a partial owner of the company, which entitles you to enjoy the company’s success and profits. However, if the company does not perform well, it’s possible the stock will lose value.

Investors can make money with stocks either by selling the stock for more than they paid for it (if the price goes up) or by receiving periodic distributions from the company in the form of dividends.

Investing in stocks can be risky, as there is no guarantee that a business will be successful or that the share price will go up. But here’s the good news: There are many different types of stocks, each of which behave differently and may play a different role as a part of your financial plan.

Bonds

A bond is essentially a loan that you (the bondholder) make to a bond issuer (a business or government).

Bonds work just like any other loan: When you hold a bond, you will receive regular interest payments from the bond’s issuer, according to the terms of the bond. Once the bond matures, you will get your initial investment back. For this reason, bonds are often referred to as fixed-income investments.

If you decide that you do not wish to hold a bond until maturity, you can sell it on the open bond market. However, the value of bonds on the secondary market can fluctuate.

While bonds are considered a less risky investment compared to stocks, they still carry some risk, primarily that the bond issuer might default on its obligations. Risk varies with distinct types of bonds, so it’s important to understand how each type of bond works and what role it may play in your portfolio.

Mutual funds

Selecting individual stocks or bonds to invest in can be time consuming and difficult to manage for someone who may not have the skills and expertise necessary to choose individual investments. This is where funds—like mutual funds—can be helpful.

A mutual fund holds multiple stocks, bonds or other investments. A benefit of mutual funds is that they can provide you with instant diversification. By not overly concentrating your investments, investing in mutual funds is typically less risky than investing in one or even a handful of individual investments.

Mutual funds tend to be actively managed, meaning their holdings are periodically adjusted by a professional depending on the fund’s goals and analysis of the market. Mutual funds can be built in different ways and tend to carry higher fees compared to other types of funds.

Exchange-traded funds (ETFs)

An ETF is a collection of securities (stocks, bonds, commodities, funds) that is traded in a single transaction, similar to a mutual fund. However, unlike mutual funds, they’re traded throughout the day on an exchange, like a stock, whereas a mutual fund can be traded only once per day—at the end of the trading day. This means ETFs can offer a bit more liquidity than mutual funds.

Another key difference between the two is how minimum investments work. Most mutual funds require investors to invest a minimum amount to open a position, which can range from a few hundred to a few thousand dollars depending on the specific fund. ETFs, on the other hand, typically don’t have minimum investments other than the share price.

Index funds

Index funds track an underlying index, such as the S&P 500, Nasdaq Composite, Dow Jones Industrial Average or Russell 2000 (among others). These funds are passively managed and therefore typically carry lower fees than actively managed funds. They’re also as close to “investing in the market” as most people can get.

Because the market as a whole tends to go up over the long term—despite occasional downturns along the way—investing through index funds is one of the easiest ways for most investors to take part in this growth over time.

Certificates of deposit (CDs)

Certificates of deposit (CDs), offered by banks, are designed to provide an investor with a low-risk way of generating fixed income.

CDs can be thought of as something like a contract in which you agree to keep your money deposited with a bank for a certain length of time, and they pay you a higher interest rate than you may find with a traditional savings account. Common CD terms are three months, six months, one year, three years or five years.

CDs are FDIC insured, essentially eliminating the risk that you would ever lose your principal (up to a certain amount). However, returns on a CD may or may not keep up with the pace of inflation, which might eat away at your buying power over time. Additionally, if for whatever reason you need to access your money before the CD matures, you will typically pay a fee in the form of forfeited interest. To combat this illiquidity, you may want to look into building a CD ladder, which will ensure that you regularly have a CD reaching maturity—at which point you can either reinvest the funds or withdraw them if needed.

Alternative investments

Most new investors stick to stocks and bonds (usually purchased through funds), but as your investment knowledge grows over time, it’s not uncommon to include alternative investments—like private equity funds, commodities or hedge funds in your portfolio.

Alternative investments can offer investors numerous benefits, including the potential for dramatic gains. However, it is important to understand that this potential comes with significant risk. Alternative investments are not suitable for all investors. Investors interested in including alternative investments in their portfolios should carefully consider the role that these investments will play in the context of their greater portfolio and be mindful of the amount of the risk they’re taking on. Another thing to keep in mind is that alternative investments—unlike traditional investments—may be less liquid and harder to convert into cash.

Some alternative investment options include:

Real estate

Investing in residential or commercial real estate is another investment option that comes with a high risk and the potential of a high reward, largely because it's reliant on the performance of the housing market and the business cycle, which can be unpredictable. Real estate investment trusts (REITs), companies that own income-generating real estate, are another way to get involved in the real estate market.

Commodities

Investing in commodities is one unique way to diversify a portfolio. Commodities are tangible goods that you can invest in, like oil, gold and precious metals.

Derivatives

A derivative is an often-complex type of investment that includes options, futures and swaps that are typically based on the future price of an investment.

Private equity

Private equity is similar in concept to a stock. But while stock is purchased on the market in a publicly traded company, private equity is ownership in a company that is purchased in a private, off-market transaction.

Hedge Funds

Hedge funds are highly complicated funds that have very high investment minimums and are targeted at wealthier, more experienced investors. Hedge funds use strategies that can lead to larger returns than more traditional approaches; however, these strategies also increase the risk of losses.

Collectibles

Like commodities, collectibles are real assets that have value that can increase (or decrease) over time. Investing in collectibles takes a degree of research, however, as you’ve got to be up to speed on which items are more valuable and able to earn more than others.

Digital assets

In recent years, more and more people have started purchasing digital assets like cryptocurrencies and non-fungible tokens. While there has been a lot of excitement around many of these assets recently (and some of them have seen huge price fluctuations), the reality is that these assets are in their infancy from an investing perspective, which makes it hard for professional investors to determine their true value. As such, financial advisors typically view these as highly speculative investments.

How to buy and sell different types of investments

To purchase traditional investments, you must open an investment account. Often, this will take the form of a personal brokerage account. Other types of accounts that allow you to purchase investments include 401(k)s, IRAs, 529 college savings plans and custodial accounts.

For alternative investments, you may need to open an account specifically dedicated to holding such investments or purchase the assets on the open market. Access to alternatives may also be restricted to investors who meet specific suitability and best-interest requirements, including minimum assets and net-worth standards. Financial advisors and wealth managers often can also help you incorporate alternative investments into your portfolio.

How much money do I need to start investing?

It’s possible to start investing with any amount of money. Whether you start contributing to your 401(k), join the stock market or open an IRA, investing is all about putting money away in the hopes that it’ll grow and help you meet future financial goals.

Though there is no magic number you need to begin investing, you’ll want to—at minimum—make sure that you’re in a good position to start investing. Having a strategy for managing debt, having a healthy emergency fund and making sure you have a monthly budget that covers your spending are good habits to have in place before starting to invest.

What percentage of my paycheck should I invest?

How much you’ll want to invest will depend on how much you want for the future and what your monthly budget can tolerate. But generally speaking, you’ll want to try to invest about 10 to 20 percent of your paycheck. The majority of this will likely go into a retirement savings account, but depending on your situation, there could be other investments that make sense for your financial goals.

What type of investment is best for beginners?

As a new investor, your first step should probably be consulting with a financial advisor. An advisor can look at your whole financial situation and make recommendations that match your financial goals. They’ll typically also help make sure that you’ve diversified your investments to lower the risk that you’ll lose money.

Managing your investments

Different types of investments may help you reach different goals, and there are other financial options that can work with your investments to help you reach your goals while also helping to protect the wealth you’re building.

That’s where your Northwestern Mutual financial advisor can help. Your advisor will get to know you, your goals and your values to help you design a financial plan and investment strategy that balances staying on track for future goals with living your life today. They’ll also help you build in growth and protection strategies and point out opportunities and blind spots that may have otherwise gone overlooked. Getting help to create a plan and manage your investments can lessen worries about finances and give you more time to do what you enjoy today and in the future.

All investments carry some level of risk, including the potential loss of all money invested. No investment strategy can guarantee a profit or protect against loss.