When investing money right now, it’s essential to understand the different types of investments and the associated risk levels.
Money market funds are low-risk investment options that provide access to high-interest rates. CDs, or certificates of deposit, offer low-risk opportunities and often have higher interest rates than money market funds.
Stock index funds are a great way to diversify a portfolio and gain exposure to the stock market without taking too much risk. Annuities are another type of investment with various levels of risk depending on the type chosen.
This article outlines different ways to invest money with low, medium, and high risks. It provides information on money market funds, corporate bonds, and individual stocks.
1. Certificates of Deposit (CD)
Risk Level: Low
A CD is a savings account providing a specified interest rate for a set period. It’s federally insured and suitable for the money you’ll need in the future, such as for a wedding or a home deposit.
The term length varies between one, three, and five years. So, if you’re looking to invest your money relatively safely for a specific time and purpose, then CDs may be suitable.
If you think you’ll need cash soon, this option is unsuitable.
Where to Invest: You can find CDs with the best rates at online banks and credit unions.
2. Individual Stocks
Risk Level: High
When you own a company’s stock, you essentially own a share of the company. Stocks can provide the greatest potential returns for your investment but with the highest levels of volatility. So, it’s important to diversify your portfolio by buying a group of stocks through a mutual fund rather than buying them separately.
Stocks suit you if you have a well-diversified portfolio and are willing to accept extra risk. Because of the volatility in individual stocks, a good rule of thumb for investors is to limit individual equity holdings to 10% or less of your total portfolio.
Where to Buy Stocks: Once you have established and funded your brokerage account, you will select the order type and be an actual shareholder. Here’s a beginner’s guide to investing in stocks.
3. Corporate Bonds
Risk Level: Low to high
Corporate bonds work just like government bonds, except that you are making a loan to a corporation instead of a government. As a result, these loans are not backed by a government, making them riskier options.
If they are higher-yielding bonds, also known as junk bonds, they may be even riskier, with a similar risk/return profile to stocks than bonds.
Corporate bonds are suitable if you want a fixed-income security with a potentially higher yield than a government bond. You need to be prepared to accept some risk in return.
With corporate bonds, the higher the probability that a business goes bankrupt, the higher the yield. Conversely, bonds issued by larger, stable companies typically have lower yields. It’s down to you to find a suitable corporate bond based on your risk level.
Where to Buy Corporate Bonds: Similar to Government bonds, you can purchase corporate bond funds or individual bonds through an investment brokerage.
4. Mutual Funds
Risk Level: Low
Mutual funds are made up of stocks, bonds, and other assets. They offer an affordable way to diversify your portfolio and spread funds across multiple investments. This gives you a sense of security in case of any losses to any of your investments.
If you have long-term goals such as retirement savings, mutual funds provide great returns similar to stocks but without the hassle of buying and managing individual stocks.
Where to Buy Mutual Funds: Mutual funds are available through companies that manage them and brokerage firms. Some mutual fund vendors have no transaction fees, plus tools that will help you choose funds. Remember that mutual funds generally require a minimum initial investment of $500 to thousands of dollars. But some providers get rid of the minimum investment if you agree to set up monthly automatic investments.
5. Money Market Funds
Risk Level: Very low risk
Don’t confuse money market funds with money market accounts. Money market funds are investment products, whereas money market accounts are bank deposit accounts.
By investing in a money market fund, you essentially buy highly-rated, short-term debt issued by the government, banks, or corporations.
Money market funds are suitable if you need the money very soon and willing to take extra market risk. It’s also ideal if you’re looking to diversify your portfolio through safer investments than stocks. You can also use money market funds to set cash aside for future investments.
Even though money market funds are an investment type, you shouldn’t expect the same returns and level of risk compared to other investments covered in this article.
Where to Buy Money Market Mutual Funds: Money market mutual funds may be purchased directly from the mutual fund vendor or bank. Still, the widest range will be available through online discount brokerages (you will have to set up a brokerage account).
6. High-Yield Savings Accounts
Risk Level: Low
If you want to invest your money somewhere short-term with low risk, consider a high-yield savings account.
You can also use this type of account to store emergency funds. Federal Deposit Insurance Corporation also insure such accounts, meaning you don’t need to worry about losing your original deposit amount.
While a high-yield savings account is considered a safe investment, the risk is that the interest rates offered on such accounts might not beat inflation rates.
Where to Open High-Yield Savings Accounts: Banks, credit unions, and online lenders offer high-yield savings accounts. It’s important to shop around to find the best interest rates.
7. Dividend Stock Funds
Risk Level: Medium to high
Dividend stocks are suitable for you if you want a source of income, even if it’s small. This form of investment is ideal for both short-term and long-term investing.
When you buy stocks, it’s important to diversify your portfolio and do your research. Ensure you look at the company’s history and reputation before investing.
Where to Buy Dividend Stocks: You can find dividend stocks at any brokerage account that offers ETFs and mutual funds.
Risk Level: High
Cryptocurrencies may be the right option if you can handle high-risk investments and can afford to lose money. It’s not an ideal investment if your risk tolerance is low.
The cryptocurrency market is also unregulated, meaning the US government does not support it. This means it’s a highly risky investment.
Where to Buy Cryptocurrency: Brokerage firms offer some cryptocurrencies, such as bitcoin. But you can find all cryptocurrencies on sites like Gemini and Coinbase.
9. Series I Savings Bonds
Risk Level: Low
Series I Savings Bonds are a great low-risk investment since it adjusts to inflation. When inflation increases, the bond’s interest rate also rises. Similarly, when inflation decreases, the bond’s interest earnings lower.
Since the US government approves savings bonds, they’re considered relatively safe. But remember, the bond’s interest rates will decrease as inflation goes down, too.
10. Fixed Annuities
Risk Level: Low
An annuity will provide a certain income level over a period once you make an upfront payment.
It’s usually given out by insurance companies and can come in many forms. For example, they can pay you for a set time, like 20 years or until your death.
A fixed annuity guarantees to pay an exact sum over a specified time frame. This can be used for your retirement. You can pay a lump sum and withdraw money immediately or make payments over time and enjoy payments in the future.
What should you invest your money in?
This depends on your circumstances, risk level, and investment goals. When you decide to invest, you can use the above as a guideline while considering your risk tolerance.
For example, you can consider individual stocks if you’re open to high risk and want to invest long-term. But if your risk tolerance is low, consider a high-yield savings account or money market funds.
Asma is a freelance writer specialising in finance and business niche topics. Her experiences include working at one of the world’s oldest and largest asset management firms.
Apart from writing, Asma also enjoys reading about finance, business, and entrepreneurship.