Most beginner investors start investing with traditional investments. This chapter explores what traditional investments are and how they compare to each other.
Investing in traditional investments is usually the best choice for most young beginner investors as they have long been considered the safest way to invest money. Therefore, they can be a good way to grow your money without taking excessive risk.
This chapter will cover what traditional investments are and how they differentiate from alternative 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:
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, only accessible to high-net-worth individuals and professional investors, and lack regulation.
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 of a stock 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, 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.
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 is probably the most widely owned investment, as everyone receives their salary in cash and usually holds some amount of cash in their savings account. While cash and cash equivalents are very safe investments, they don't provide high returns. On the other hand, 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 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. Reasons for the price appreciation of real estate may include:
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.
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.
Continue with the next lesson of our beginner-friendly guide “Basics Of Investing”.