The three main types of investments are equities, fixed-income and cash/cash-equivalents.
Stocks and mutual funds are two very popular examples of equities. They’re what we’re most familiar with when we think of “investing” or “the stock market” (Apple stock, Google stock, Facebook stock, etc.). When you invest in equities, your main goal is to make money through the growth of these stocks and/or mutual funds. Even though there is an unlimited amount of money you could potentially make investing in equities, the trade off is it’s a bit of a gamble. You could also lose most (or all) of your money too.
Fixed-income most often refer to bonds. Bonds are basically when a government or corporation pays you interest for letting them borrow your money. Bonds will give you a pretty predictable amount of income at regular intervals like 5% every 6 months. The steady stream of income you get from bonds makes it a “safer” investment than equities. But they will never grow like equities so don’t expect to get rich overnight from this type of investment.
Cash is pretty self-explanatory. Cash-equivalents refer to investments that can be easily converted into cash without losing value (like bank CDs and T-bills).
Now that you know what the 3 most common types of asset classes are, next time we’ll cover how much money you should invest in each group. The investment lingo for this is asset allocation.