11 Common Types of Investments and How They Work

Investing can be intimidating; with so many options available, from stocks and bonds to annuities and mutual funds, which ones are right for your investment portfolio? First, familiarize yourself with the most common types of investments, then consider how they fit your portfolio. If you’re serious about investing, it might be a good idea to find

A financial advisor can help you figure out which investments work best for your budget and long-term goals.

What Are the Main Investment Categories?

While there are many types of investments, each type fits into one of three categories: equity, fixed-income, and cash or cash equivalents.

The term “equity” covers any kind of investment that gives the investor an ownership stake in an enterprise. One example is common stocks. Other examples are preferred shares, funds that hold stocks (such as exchange-traded funds and mutual funds), private equity, and American depositary receipts.

The term fixed-income covers any kind of investment that entails the investor essentially loaning money to an enterprise. The most common example is bonds, which come in various forms, including corporate bonds and local, state or federal government bonds. Some fixed-income securities have equity-like characteristics, such as convertible bonds.

Cash and cash equivalents, like checking accounts, savings accounts, certificates of deposit, and money market accounts, are the third category of investment. Money market funds are sometimes considered cash equivalents because they’re easy to withdraw from, but they are technically fixed-income securities.

11 Types of Investments

Investing offers a pathway to grow wealth and achieve financial goals, but navigating the diverse landscape of investment options requires informed decisions that align with your financial objectives, risk tolerance, and time horizon. Here are 11 common types of investments:

1. Stocks

Stocks, also known as shares or equities, might be the most well-known and simple type of investment. When you buy stock, you’re buying an ownership stake in a publicly traded company. Many of the biggest companies in the U.S. are publicly traded, meaning you can buy stock in them. Some examples include Exxon, Apple and Microsoft.

How you can make money: When you buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of course, is losing money if the stock price goes down.

2. Bonds

When you buy a bond you’re essentially lending money, generally to a business or government, for a set period of time. Companies issue corporate bonds, whereas local governments issue municipal bonds. The U.S. Treasury issues Treasury bonds, notes, and bills.

How you can make money: While the money is being lent, you get interest payments. After the bond matures, meaning you’ve held it for the contractually determined amount of time, you get your principal back.

The rate of return for bonds is typically much lower than stocks, but bonds present lower risk. There’s still some risk involved, of course. The company you buy a bond from could fold or the government could default. This rarely happens however, so investors typically consider treasury bonds, notes, and bills as very safe investments.

3. Mutual Funds

A mutual fund pools investors’ money and invests it across a range of companies. Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks securities on behalf of investors. Because of this responsibility, fund managers often try to choose investments that will outperform a designated market index.

A passively managed fund, also known as an index fund, simply tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500. Mutual funds can invest in a broad array of securities: equities, bonds, commodities, currencies, and derivatives. Depending on the investments, mutual funds can carry many of the same risks as stocks and bonds. The risk is often lesser, though, because the investments are inherently diversified.

How you can make money: Investors make money off mutual funds when the value of stocks, bonds, and other bundled securities that the fund invests in go up. You can buy fund shares directly through the managing firm and discount brokerages. But note there is typically a minimum investment and you’ll pay an annual fee for management.

4. Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are similar to mutual funds in that they are a collection of investments that track a market index. Unlike mutual funds, which are purchased through a fund company, shares of ETFs are bought and sold on the stock markets. An ETF’s price fluctuates throughout the trading day, whereas a mutual fund’s value is calculated at the end of each trading session using the net asset value.

How you can make money: ETFs make money from the collection of returns among all of their investments. ETFs attract new investors because they’re more diversified than individual stocks. You can further minimize risk by choosing an ETF that tracks a broad index. And just like mutual funds, you can make money from an ETF by selling it as it gains value.

5. Certificates of Deposit (CDs)

A certificate of deposit (CD) is considered to be a very low-risk investment. It’s a time-bound deposit that earns interest until it reaches its maturity date. After that, you get your principal back plus any earned interest. The longer the loan period, the higher your interest rate is likely to be, but this is a low-risk, low-reward type of investment that earns less than most of the others on this list.

How you can make money: With a CD, you make money from the interest that you earn during the term of the deposit. CDs are good long-term investments for saving money. There are no major risks because they are FDIC-insured up to $250,000, which would cover your money even if your bank were to collapse. That said, you have to make sure you won’t need the money during the term of the CD, as there are penalties for early withdrawals.

6. Retirement Plans

A retirement plan is an investment account with certain tax benefits, where you invest money for retirement. There are several types of retirement plans, such as workplace retirement plans, sponsored by your employer, including 401(k) plans and 403(b) plans. If you don’t have access to an employer-sponsored retirement plan, you could get an individual retirement account  (IRA) or a Roth IRA.

How you can make money: Retirement plans aren’t a separate category of investment, per se, but a vehicle to buy stocks, bonds, and funds in two tax-advantaged ways. One type of account  lets you invest pretax dollars (as with a traditional IRA) and defer taxes on the gains until you withdraw the money in retirement. The second allows contributions with after-tax money that can then grow and be withdrawn tax-free. The risks for the investments are the same as if you were buying the investments outside of a retirement plan.

7. Options

An option is a somewhat more advanced way to buy a stock. When you buy an option, you’re purchasing the ability to buy or sell an asset at a certain price at a given time. There are two types of options: call options for buying assets and put options for selling assets.

How you can make money: As an investor, you lock in the price of a stock with the hope that it will go up in value. However, the stock could also lose money. So if the stock decreases from its initial price, you lose the money from the contract. Options are an advanced investing technique and retail investors should exercise caution before using them.

8. Annuities

When you buy an annuity, you purchase an insurance policy and, in return, receive periodic payments. These payments generally come down the road in retirement, but the annuity itself is often purchased years in advance. This is why many people use annuities as part of their retirement savings plan.

Annuities come in numerous varieties. They may last until death or only for a predetermined period. They may require periodic premium payments or just one up-front payment. They may link partially to the stock market for additional growth or they may simply be an insurance policy with no direct link to the markets. Payments may be immediate or deferred to a specified date. They may be fixed or variable.

How you can make money: Annuities can guarantee an additional stream of income for retirement. But while they are fairly low risk, they aren’t high-growth. So investors tend to use them as a supplement for their retirement savings, rather than an integral source of funding.

9. Derivatives

A derivative is a financial instrument that derives its value from another asset. Similar to an annuity, it’s a contract between two parties. In this case, though, the contract is an agreement to sell an asset at a specific price in the future. If the investor agrees to purchase the derivative, then they’re betting that the value won’t decrease. Derivatives are considered to be a more advanced investment and are typically purchased by institutional investors.

The three most common types of derivatives are:

• Options contracts: The options contract gives the investor the opportunity to buy or sell an asset at a specific price at a specific time in the future. Call options provide you the opportunity to buy the asset at that price and put options allow you to sell the asset.
• Futures contracts: Futures are contracts that commit to a sale being made at a specified time and on a specified date.
• Swaps: This is an agreement between two parties to exchange cash flows in the future.

How you can make money: You can make money investing in derivatives if you’re on the right side of price fluctuations. For example, if you agree to buy copper at $1,000 in nine months, but the market price at that time is $2,000, then you’ve essentially doubled your investment. However, predicting the trajectory of prices with accuracy can be extremely difficult.

10. Commodities

Commodities are physical products that you can invest in. They are common in futures markets where producers and commercial buyers – in other words, professionals – seek to hedge their financial stake in the commodities.

Retail investors should make sure they thoroughly understand futures before investing in them. The price of a commodity can move sharply and abruptly in either direction due to sudden events. For instance, political actions can greatly change the value of something like oil, while the weather can impact the value of agricultural products.

Here’s a breakdown of the four main types of commodities:

• Metals: Precious metals (gold and silver) and industrial metals (copper)
• Agricultural: Wheat, corn and soybeans
• Livestock: Pork bellies and feeder cattle
• Energy: Crude oil, petroleum products and natural gas

One of the primary ways that investors make money with commodities is by trading commodity futures. Investors sometimes buy commodities as a hedge for their portfolios during inflation. You can buy commodities indirectly through stocks and mutual funds or ETFs and futures contracts.

11. Hybrid Investments

Hybrid investments incorporate elements of equities and fixed-income securities. One such example are preferred shares, which are an equity security with a bond-like feature. Preferred stock generally comes with a fixed dividend rate. Dividends to preferred shareholders are paid before dividends to common shareholders.

Another difference is that if the company that issued the shares is liquidated, preferred stockholders will have access to the company’s assets before common stockholders. Owners of preferred stock are behind bondholders in line for company assets, but they’re ahead of owners of common stock.

Another type of hybrid is a convertible bond. It’s a corporate bond that can be “converted” into shares of the company. A bond is a loan to a company, whereas a share is a piece of ownership. When you convert from a bond to a share, you go from being a lender to the company to a part-owner of the company.

Tax Considerations for Different Investment Types

Having an idea of how your investments are taxed is essential to maximizing your returns. While many new investors focus on performance, the tax treatment of different asset types can significantly affect your bottom line.

Capital gains taxes apply when you sell an asset like ETFs, stocks, or mutual funds for more than you paid. If you’ve held the asset for more than a year, it’s taxed at the lower long-term capital gains rate. If held for less than a year, it’s taxed as ordinary income, which can be a higher rate depending on your tax bracket.

Interest income—from sources like bonds, certificates of deposit (CDs), and money market accounts—is generally taxed at your ordinary income rate. Because of this, interest-earning investments may be less tax-efficient when held in taxable accounts.

Dividends can be either qualified or non-qualified. Qualified dividends, typically paid by U.S. companies on stocks held for a certain period, are taxed at the favorable capital gains rate. Non-qualified dividends are taxed as ordinary income.

Annuities are tax-deferred, meaning you won’t pay taxes on earnings until you withdraw the funds. However, when you do withdraw, the earnings are taxed as ordinary income—not capital gains.

Investing through tax-advantaged accounts like IRAs, 401(k)s, or Roth accounts can help reduce your tax burden. Traditional IRAs and 401(k)s allow for tax-deferred growth, while Roth accounts grow tax-free and allow tax-free withdrawals in retirement.

Factoring in taxes can help you choose the right account and investment mix to keep more of your earnings in the long run.

How to Buy Different Types of Investments

When looking to grow your wealth, knowing how to buy different types of investments is essential for building a diversified portfolio. The investment landscape offers numerous options, each with unique characteristics, risk profiles, and potential returns. Before making any purchases, take time to research and understand what each investment type entails and how it aligns with your financial goals.

There are two main ways for you to purchase the different types of investments you may be interested in buying. Both will require you to have an investment account, but only one of the two provides a service that’s completely done for you. The two general ways to buy the types of investments you want are:

1. Start an online brokerage account: You can elect to manage your own investments and just open a brokerage account. This enables you to get up and running quickly with the ability to buy stocks, bonds, mutual funds, and more in a matter of minutes. The only downside is that you’ll be making the final financial decisions all on your own.
2. Hire a financial advisor: The other way to buy multiple types of investments is to work with a financial advisor. The advisor can not only provide you with access to buy and trade assets, but they can also help you figure out an overall financial strategy and prepare you adequately for retirement. This is more of an automated process in that you just have to approve trades or investments and the advisor takes care of the details. Your advisor can help you get a brokerage account, as needed.

How to Match Investment Types to Your Goals and Time Horizon

Knowing what each investment type is and how it works is a starting point. Knowing which ones belong in your portfolio depends on what you are trying to accomplish and how much time you have to get there. The same investment that makes sense for one person can be entirely wrong for another based on those two variables alone.

Short-Term Goals: One to Three Years

For money you expect to need within a few years, capital preservation takes priority over growth. Investments that can lose significant value in a short period, such as stocks or long-term bonds, creating the risk that a market decline may force you to sell at a loss right when you need the funds. For short time horizons, cash equivalents, short-term CDs, and money market accounts are more appropriate. The returns are modest, but the principal is protected and accessible when needed. A down payment on a home, an emergency fund, or funds for a near-term major purchase all fall into this category.

Medium-Term Goals: Three to 10 Years

A medium-term horizon allows for some growth-oriented exposure while still requiring attention to managing downside risk. A blend of bonds and dividend-paying stocks or balanced mutual funds can provide moderate growth while reducing the volatility associated with a pure equity portfolio. The specific mix depends on how sensitive you are to interim losses and whether a significant decline partway through would cause you to abandon the strategy. Someone saving for a child’s education in five years, for instance, may want to gradually shift toward more conservative holdings as the target date approaches.

Long-Term Goals: 10 Years or More

For goals that are a decade or more away, such as retirement for a younger investor, the ability to tolerate short-term volatility in exchange for higher long-term returns makes equities and equity funds the primary building block of a strong portfolio. Historically, stocks have outperformed other asset classes over long periods, and a longer time horizon provides more opportunity to recover from downturns before funds are needed. Index funds and ETFs that provide broad market exposure at low costs are a common choice for long-term investors who do not want to pick individual securities. Growth-oriented investments, including small-cap stocks and sector funds, may also have a place for investors with both a long horizon and a higher risk tolerance.

Retirement Specifically

Retirement planning spans multiple time horizons simultaneously. Early in a career, the retirement account is a long-term growth vehicle and can carry more equity exposure. As retirement approaches, the focus shifts toward capital preservation and income generation. In retirement itself, the portfolio needs to generate reliable withdrawals while still growing enough to offset inflation over a potentially lengthy retirement period. Annuities can play a role in guaranteeing a portion of income, while a mix of dividend-paying stocks and bonds can provide both stability and continued growth.

Risk Tolerance as a Modifier

Time horizon sets the outer boundary of what is appropriate, but risk tolerance determines where within that boundary you land. Two investors with the same time horizon can hold very different portfolios if one experiences significant anxiety during market downturns and the other does not. An investor who will sell equities during a market correction effectively has a shorter time horizon than their calendar suggests, which means their portfolio should reflect a more conservative allocation than the time horizon alone would indicate. Matching investments to your actual behavior under stress, not just your stated preferences, produces a more durable plan.

A Practical Starting Framework

As a general reference point, a rough allocation framework used by many financial planners starts with the percentage of bonds in a portfolio approximating the investor’s age, with the remainder in equities. A 30-year-old might hold 30% bonds and 70% equities, while a 60-year-old might hold 60% bonds and 40% equities. This is a starting point rather than a rule, and individual circumstances including income stability, assets, spending needs, and risk tolerance all affect what the right allocation actually looks like.

Diversification does not eliminate risk; it reduces the impact of any single investment performing poorly, but all investments carry some level of risk. Asset allocation across stocks, bonds, and other asset classes will generally have a greater impact on your long-term returns than which specific securities you choose.

A financial advisor can help translate these general principles into a specific allocation that reflects your complete financial picture.

Bottom Line

There are a lot of different types of investments to choose from. Some are perfect for beginners, while others require more experience and research. Each type of investment offers a different level of risk and reward, giving you a good option or two no matter what your goal might be. Investors should consider each type of investment before determining an asset allocation that aligns with their overall financial goals — and that alignment matters more than most people expect.

“Most people simply think of stocks and bonds when they consider what to invest in. While those assets make up the bulk of Americans’ investment portfolios, there may be circumstances where it’s appropriate to pick up alternative investments. Often, meeting with a financial advisor can bring clarity and understanding to your situation and give you direction so your investments are in alignment with your overall financial goals,” said Loudenback, CFP®.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Investing Tips

• It can sometimes help to have an expert in your corner when investing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If your investments pay off, you may owe the capital gains tax. Figure out how much you’ll pay when you sell your stocks with our capital gains tax calculator.

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