Investing in stocks and/or bonds is not the only strategy you can use when it comes to investing. While many individuals will invest most of their funds in the traditional stocks, bonds, ETFs, and mutual funds, understanding less common options for investing is part of growing your overall financial literacy.
Other types of investments include commodities, foreign exchange, real estate (including REITs, or Real Estate Investment Trusts), hedge funds, private equity, and the hot topic nowadays: cryptocurrency. Below are explanations of these different options.
Commodities are the OG of market trading. They are actual physical assets, such as gold, silver, oil, natural gas, or agriculture, to name a few. Typically, these are traded in contracts, without any exchange of the actual asset. An easier way to get into this type of investing option is by purchasing ETFs in any of these sectors. It is worth noting though that you can own actual gold and silver (usually in bars); not every investment firm will let you do this, but there are some that will.
This simply refers to buying the currency of a country. One possible strategy for doing this is that you could capitalize on the value of one country’s currency going up or down. Some examples of currencies you can purchase are the US Dollar, the Japanese Yen, the Euro, the Australian Dollar, the Great British Pound, and many more. Keep in mind with investing in currency is that it’s high liquidity, which means you would have a high cash value.
There are a few different ways that you can invest in real estate as part of your overall investing strategy. You could purchase physical assets, such as land, a home (whether that is single family or multi-family), or even a commercial building. If those options are out of your price range, then you could consider investing in real estate investment trusts (REITs). The concept of these is similar to an ETF: it is a basket comprised of various types of real estate investments and they trade on exchanges like common stock. REITs collect lease income and pass through at least 90% of the proceeds to the shareholders as dividends.
Hedge Funds And Private Equity
Hedge funds and private equity are also options for investing, however they definitely carry a lot more risk, so you do have to be an accredited investor to participate. An accredited investor is someone who has an earned income of more than $200,000 annually and a net worth of over $1,000,000.
Hedge funds are companies that try to aggressively achieve high rates of return by employing advanced strategies across global markets. Keep in mind with hedge funds that there is a 2% management fee and a 20% performance fee. These are definitely high risk, high reward. Private equity on the other hand is an asset class that consists of investments that are not publicly traded. Private equity firms invest in private companies and are often involved in buyouts and company restructurings.
Simply put cryptocurrency is digital currency in the form of digital tokens or coins that are encrypted using blockchain technology. They operate independently of centralized banks, so there is minimal regulation. The technology that crypto uses, blockchain, is decentralized and difficult to trace, which allows for some level of anonymity. Each block contains the details of a given transaction. The only way to hack or steal the currency is to have the exact details for every block in the chain, making it extremely secure. Advocates of cryptocurrency suggest that in the future it is to be used for all types of payments, especially online, which would make it even more secure than current banks and/or credit cards.
Most of us have an investment strategy that is dominated by stocks and bonds, possibly with a smattering of alternatives, like real estate. Trading in commodities, foreign exchange, and cryptocurrencies is definitely a move to the 2.0 level of investing. Still, as you continue on your financial journey, knowledge is power!
5 Different Investing Options (other than stocks/bonds) is written by Jenny Harp, A Certified Financial Trainer for financialgym.com