🏛 Basics Of Investing

Traditional Investments

Closeup of three US dollar notes displaying the face of Benjamin Franklin

Beginners Guide To Traditional Investments

As a beginner investor, you will likely start to invest in traditional investments. So here's everything you need to know about them.

Investing in traditional investments is usually the best choice for most young beginner investors. Traditional investments have long been considered the safest way to invest money. They can be a great way to grow your money without taking on too much risk.

This post will cover what traditional investments are and how they differentiate from alternative investments.

🧭 Key Takeaways

Traditional investments are well-known and strictly regulated and generally include stocks, bonds, and cash. They stand in contrast to alternative investments, which are often more speculative and less regulated. Sometimes, real estate is also included as a traditional investment. However, there is no consensus on whether real estate should count as a traditional or alternative investment.

Scroll To Top

What Are Traditional Investments?

Traditional investments are well-known and strictly regulated assets that you can invest in. When you invest in traditional investments, you can make money either from an increase in the value of your investment or by receiving income in the form of interest or dividends.

Traditional investments commonly include the following types of assets:

  • Stocks
  • Bonds
  • Cash and cash equivalents
  • Real estate

The counterpart to traditional investments are so-called alternative investments, also known as non-traditional investments. Alternative investments tend to offer higher returns but at the cost of higher risk. Most alternative investments are complex to understand, less frequently traded, and lack regulation.

📖 Read More

A pile of timber logs.

Alternative Investments Explained: Investments Beyond Stocks

Alternative investments have been around for a long time, but their popularity has grown. Should young beginner investors invest in alternative investments?

Scroll To Top

What Types Of Traditional Investments Exist?

Stocks

A stock (also known as share) is a single unit of ownership in a company that can belong to either a public or a private company. When individual investors talk about investing in stocks, they mainly refer to purchasing shares in publicly-traded companies that can be traded on stock exchanges. Stock investments are also sometimes referred to as equity investments as the investor acquires a stake in the company in return for equity.

In the short term, the share price depends on the overall market sentiment, which is influenced by various factors. These include news about the company or the general state of the market and economy. Contrary, in the long term, the share price primarily depends on fundamental factors, such as the assets and liabilities of the company or the expected future earnings and growth rate.

Stock investing is very accessible, and there are many commission-free trading apps, like Trading 212, which primarily target young investors. Because of the easy access to buying and selling stocks, they are often the first investment young investors will make. Their wide acceptance also led to many investors using the term investing synonymously for stock investing.

When you invest in stocks, you can either pick individual stocks, or you can invest into exchange-traded funds (ETFs). ETFs mirror the performance of either the whole market or a subset of it. Because ETFs guarantee average performance, they are a great choice if you do not have the time or knowledge to evaluate individual investments.

Bonds

A bond is a fixed-income investment issued by governments, corporations, and other entities. It represents a promise by the bond issuer to make regular interest payments. The bond issuer also promises to pay back the initial price of the bond once it has matured.

Bonds are being issued to raise capital in the market without diluting the company's ownership through the issuance of new shares. Another reason for issuing bonds is to provide extra liquidity to finance the short-term operations of a company or government.

Bonds are often considered to be one of the safest investments available and provide investors with a regular income stream. Like stocks, bonds can be publicly traded on bond markets.

Cash And Cash Equivalents

Cash is probably the most widely owned investment, as everyone receives their salary in cash and usually holds some amounts of cash in their savings account. Nowadays, it is hard to earn high interest on your cash. As a result, you should only hold cash when you plan to save it with a short time horizon and cannot risk losing some or all of its value.

You might wonder what cash equivalents are. Cash equivalents are assets that can easily and quickly be converted to cash as they hold an equivalent value. These include high-yield bank accounts, money market accounts, or certificates of deposit.

Real Estate

Real estate is the most commonly held investment choice and the largest asset class in existence. When rented out, it provides regular cash flows through rent paid by tenants. However, it also provides utility to the owner as they can use the real estate for themselves.

In addition to rental income, real estate owners can also increase the property's value and then sell it at a higher price. Reason for the price appreciation of real estate may include:

  • The location of the property. For example, by being located in an in-demand location.
  • An increase in the value through renovations of the property.
Scroll To Top

Is Real Estate A Traditional Investment?

Real estate is frequently classified as either a traditional investment or an alternative investment, and there doesn't seem to be a reasonable consensus on this matter. But, in the end, it depends on how you look at it.

On the one hand, it is the most widely held investment and can therefore be considered a traditional investment. However, on the other hand, the liquidity of real estate is much lower than for other traditional investments. Stocks or bonds can often be traded within seconds or minutes on public market exchanges. This stands in contrast to buying or selling real estate, which is more complicated and time-consuming.

Share Your Thoughts

Did you learn something new? Write about it on your favorite social media site.