Most people think primarily of stocks when they consider what it means to invest money. For many people, however, investing in stocks seems overwhelming. The learning curve for purchasing stocks is indeed steep, and individuals still need to complete thorough due diligence for each purchase once they understand how exchanges work.
Individuals should therefore avoid getting stuck in the trap of thinking that stocks are the only way to invest money. In truth, stocks are probably not the best form of investment for most people. Some other vehicles to consider include the following:
- Real estate
Investing in real estate typically involves purchasing and owning property. In most cases, individuals become landlords and collect rent from people who live in the properties, which can range from single-family homes to multifamily apartment buildings. This type of investment can prove very lucrative because individuals do not have to surrender all the purchase money up front. By taking out a mortgage, individuals can use rents to pay it and then benefit from appreciation of the property. After the mortgage is paid, all rent is profit.
Of course, purchasing real estate still involves quite a bit of risk. Individuals can spread the risk out by finding a partner with whom they can purchase more or larger buildings, which can help safeguard against vacancies. Another option is a real estate investment trust (REIT), although this choice is similar to buying stocks because it requires dealing with a broker. Individuals should also ask themselves if they have the time and energy to be a landlord. Management companies are convenient alternatives to hands-on ownership, but they eat into profits.
- Small business
Most people do not think of opening a small business as an investment, but doing so is not much different than providing capital to a startup. This route involves incredible risk, but it also offers the chance for great reward. Small businesses can end up growing into large, lucrative companies.
Today, it is easier than ever to open a small business with the popularity of e-commerce. Online businesses involve much less overhead than brick-and-mortar enterprises, and they can produce a steady income stream that proves a decent return on investment. Part-time businesses often do not need much of an investment, so individuals will worry less about the company failing. Still, people should protect themselves legally as much as possible.
- Peer-to-peer lending
This approach to investing is rather new, but it’s growing quickly in popularity. Individuals apply for a peer-to-peer loan for a variety of purposes, from funding businesses to covering personal expenses. Borrowers must qualify for the loan, which is then funded by individual investors rather than by a bank. Typically, individuals pool their money with other investors rather than completely funding a loan on their own.
What makes peer-to-peer lending attractive is the high returns. Historically, individuals have achieved double-digit returns, which is much higher than average stock returns. The money comes back in the form of fixed monthly payments, which include the principal plus interest.
At the same time, these high returns come with significant risk. Borrowers turn to peer-to-peer lending when they cannot get loans through traditional outlets. While investors can set a minimum credit rating for lending and still say “no” to particular loans, the risk of default is real.
Another investment that many people do not view as an investment, collectibles include memorabilia, wine, art, cars, and more. Ideally, collectibles should grow in value over time, although this growth is not guaranteed. Before entering into a particular field of collectibles, individuals should have a deep knowledge of that category so that they can make smart decisions and avoid getting scammed.
One downside of collectibles is that they often require a significant investment up front. Also, collectors need to divorce themselves from emotional attachments. Just because an investor particularly likes a piece of art or a bottle of wine doesn’t mean that other people will pay top dollar for it.
- Precious metals
The thought of investing in precious metals may make people think of the Great Recession, when the value of gold and silver rose monumentally as the stock market fell by more than 50 percent. However, investing in precious metals continues to be a valid way of saving for the future. For example, between 2007 and 2011, the value of gold rose from about $600 an ounce to $1,900 an ounce. While the value has since fallen, these figures illustrate the incredible returns that savvy investors can achieve.
In general, people should not put all of their money into precious metals as this approach to investing is a very speculative one. At the same time, when the stock market falls, commodities tend to increase in value, so it is not uncommon for investors to use precious metals to hedge against stock market volatility.
Different avenues for investing exist. For example, individuals can purchase gold coins or bars, gold accounts, or gold exchange-traded funds. Indirect investing methods also exist, such as gold-mining futures and options.