Even when you know investing is the right move for you, figuring out where to start can feel like a real puzzle. There are so many choices, and it’s natural to wonder, "Which investments make the most sense for my portfolio?" We're here to demystify a few different basic investment securities, or the building blocks of any portfolio.
Let's start with a quick, stress-free quiz to see what you already know.
Master the basics: The 101 on investment securities
Before you dive into developing your unique investment portfolio that reflects your goals, risk tolerance and timeline, it's a good idea to get comfortable with some of the most common types of investment securities. Think of this as a guide to the investment landscape.
Read more: Which type of investment account is right for you?
Stocks: Your tiny piece of the pie
When you buy a stock, you're essentially purchasing a small piece of ownership in a public company. Imagine owning a tiny slice of your favorite coffee shop or tech giant. Companies sell shares of stock to raise money for growth, research or other business needs. Stocks are often what people think of as a staple of traditional investing, but they can be more volatile than some other investment types and lead to greater risks, too, as they rely on the performance of a single company.
Bonds: Lending your money wisely
Think of a bond as an IOU. When you buy a bond, you're essentially lending money to a government (federal, state or local) or a corporation. In return, they promise to pay you back your original loan amount at a specific future date, plus regular interest payments along the way. Because these payments are generally predictable, bonds are often seen as a less risky investment compared to stocks. They're one method to generate steady income for your portfolio. However, they're typically considered to have less growth potential, too.
Mutual funds: Pooling your power
Mutual funds are professionally managed investment portfolios that pool money from many investors. With all this collected cash, the fund manager then buys a diverse basket of stocks, bonds or other securities. This means when you invest in a mutual fund, you automatically get a slice of that diverse portfolio. A mutual fund is one method to achieve diversification without having to pick individual securities yourself. However, it's worth noting that some mutual funds come with management fees and that they’re priced once a day at market close (rather than throughout the day, like a stock).
Index funds: Tracking the market's rhythm
An index fund is a type of mutual fund (or sometimes an ETF, which we'll talk about next) that aims to match the performance of a certain market index. Think of famous indexes like the S&P 500, which tracks 500 of the largest U.S. companies. Instead of trying to "beat the market," index funds just follow it. They're popular because they offer broad market exposure, built-in diversification and often come with lower fees than actively managed mutual funds.
Exchange-traded funds (ETFs): Flexibility at your fingertips
An exchange-traded fund (ETF) is similar to a mutual fund in that it holds a collection of assets (like stocks, bonds or commodities). The big difference? You can buy and sell ETF shares on a stock exchange throughout the day, just like you would with an individual stock. This offers you more trading flexibility compared to traditional mutual funds, which are typically bought or sold only once per day after the market closes. Many index funds are structured as ETFs, combining broad market exposure with the convenience of stock-like trading.
Options: For the more experienced investing adventurer
Now, options are a bit more advanced. These are contracts that give you the right or obligation to buy or sell an asset (like a stock) at a specific price before or on a certain date. They can be used for various strategies, including hedging or speculating, but they do come with a higher level of complexity and risk.
If you're a beginner investor, consider starting with the foundational securities we've already reviewed. Options might be for you down the line, but may not be the best early step in investing.
Choosing your path: It's all about you
Choosing the right types of investments — the ones that truly fit your goals, risk tolerance and timeline — is a very personal journey. As you continue to learn more, you'll build confidence that you can pursue your goals using the skills you develop.
