Common Investment Products

There are many investment products out there and understanding all of them can be difficult. This guide provides a short description of some of the more commonly discussed investment products.

Equities

Publicly traded equities are stocks that are traded on the stock market. These assets are highly liquid and have the potential to be volatile. Investors trade stocks through a broker such as ETrade, Charles Schwab, Robinhood, etc. Stocks can include those of domestic US companies (Boeing, McDonalds, Facebook, etc) or international companies (Alibaba, Samsung, etc)

Cash or Cash equivalents

These are currencies issued by a nation and what you would have in your bank account. Cash is subject to varying levels of value depending on inflation/deflation and exchange rates. Cash is considered extremely liquid and generally nonvolatile, except in cases of extreme inflation (Weimar Germany) or deflation (United States early 1930s).

Fixed income investments

Fixed income investments are instruments that deliver a fixed, predictable return over a period of time such as a bond. This is just a fancy way of saying “A loan that can be traded.” Bonds can be issued by a nation (US Treasury Bond), a city/state (Muni Bond), or a company (Corporate Bond). Bonds are considered nonvolatile because its return is predetermined. While generally considered a low yielding safe investment, this is not always the case. Their yield varies depending on the term and the credit worthiness of the bond issuer. Some bond issuers may declare bankruptcy (Hertz 2020, Detroit 2013), which may cause the investor to take a loss on their investment. Credit rating agencies such as Moodys provide ratings on bonds on a scale of D (Junk) to AAA (Investment Grade Quality).

Exchange Traded Funds (ETFs)

Exchange Traded Funds are funds that are composed of other securities such as bonds, stocks, commodities, or options. They are intended to track a sector or the total market. Publicly traded ETFs are subject to volatility as their price fluctuates throughout the trading day. Because they are readily traded they are also easy to liquidate. ETFs generally have lower fees than mutual funds and allow investors to buy exposure to many different securities (stocks/bonds/etc) with less cash. Investors have no control over what stocks go into an ETF nor can they control the distribution of the stocks in an ETF. If a rouge ETF manager wanted to go all in on Gamestop, you would be powerless to stop them.

Mutual Funds

A mutual fund pools money from a group of investors to be invested with a particular strategy. Mutual funds have a target return rate and target risk. These funds are a passive investment and are managed by a fund manager who charges nontrivial management fees regardless of the funds performance. Most money from company retirement plans are in mutual funds. The performance of the fund is dependent on the assets in the fund and the decisions made by the fund manager.

Hedge Funds

Hedge funds are actively managed funds that use leverage, derivatives, or alternative investments to deliver returns. Because they are highly managed funds, fund managers may charge expensive fees. Hedge funds are also typically limited to accredited investors because of the risks involved and the lower levels of transparency. Hedge funds can be volatile because of the strategies involved and illiquid because funds generally have rules preventing investors from withdrawing money for a certain amount of time.

Cryptocurrencies

Cryptocurrencies, or crypto for short, are an emerging asset class that is based on blockchain technology. Their legal status is still uncertain as critical SEC rulings are pending and some countries have banned them outright. Currently, most cryptocurrencies are classified by the SEC as a commodity and not a currency or security. Cryptocurrencies are traded 24 hrs, 365 days a year. Because the market for cryptocurrency is always open and because of the lack of comparable assets and metrics, cryptocurrencies are generally considered highly volatile. Cryptocurrency can be traded through a crypto exchange such as Coinbase where the user holds the cryptocurrency in their crypto wallet. They can send crypto to other users or exchange their crypto for goods and services with merchants that accept them. For example, AT&T accepts bitcoin as a form of payment. Investors can also buy crypto through a broker like Robinhood. However, users who buy crypto in this manner only own the asset on paper and can not spend or exchange their crypto.

Options

Options are highly volatile derivatives used by experienced traders and institutions to hedge their portfolio. Think of them like an insurance contract. Options give the holder the right to buy or sell a stock at a pre-agreed upon price before a pre-agreed upon expiration date.

Commodities

Commodities are basic goods such as oil, corn, beef, cotton, steel, gold, etc. They are traded on an exchange such as the New York Mercantile Exchange. Investors can invest in them through futures contracts, a commodities ETF, or by buying the raw material outright like gold coins from the US mint. Depending on how the investor is invested, liquidity may vary. It is easier to sell a futures contract or share of an ETF than it is to find a buyer for a crate of gold bullion buried in your backyard. Volatility varies with the commodity. If conflict in the middle east threatens the closure of the Strait of Hormuz, oil prices may become volatile as supply uncertainties mount.

Real Estate

Real estate is an asset class that includes both residential (single family houses), and commercial (malls, data centers, large apartment complexes). Investors can invest in Real Estate through a Real Estate Investment Trust (REITs), which is similar to an ETF but for real estate or they can invest in real estate by purchasing the properties directly. REITs are liquid and subject to volatility because they are traded on the stock exchange. Tangible real estate is illiquid because it takes more time and effort to list and sell a property. Tangible real estate is also less volatile because there are less pricing events. While a REIT may move several percentage points on the stock exchange in a single day, it is unlikely that the value of your house will change several percentage points in a single day.

Alternative Assets

Alternative assets include things such as antique cars, fine art, wine, collectible Pokemon cards, etc. These items are generally illiquid and nonvolatile because the market for them is small. They are traded in private transactions or at auctions.

Privately Traded Equities (Pre-IPO)

Privately traded companies such as (SpaceX, Chime, Discord, etc) are typically only available to accredited investors and institutions such as venture capitalists. Private equities are illiquid and because pricing events are infrequent they are also less volatile. There is no exchange where these types of equities can be traded.

Disclaimer: PeerInvest is not a financial advisor and this post is for informational purposes only. Please consult a financial advisor before acting on the information in this post.