7 Types of Traditional Investments to Consider (2024)

Traditional Investments

Investing is crucial to safeguarding your financial future, but with all the options, how do you determine where to begin? Read on to learn more about the seven most common types of traditional investments you need to know about.

1. Financial Institution Products

Credit unions, banks, and other financial institutions can provide a safe, convenient, and accessible way to accumulate savings by investing your money. Your investments at credit unions and banks are federally insured up to set limits, typically $250,000, by the government; so, you can rest assured that your money is safe. When shopping for investment products at a financial institution, make sure to consider your local credit union. Credit unions often offer the best rates and lowest (or no) fees.

Types of Financial Institution Investment Products

• Savings Accounts: these accounts typically have the lowest minimum deposit requirements and the fewest withdrawal restrictions, so your investments in a savings account are generally liquid. Because of the liquidity, these accounts typically pay the lowest interest rates of other investment accounts.
• Certificate of Deposits (CDs): CDs are savings accounts that earn interest on a lump sum for a fixed period. These accounts differ from traditional savings accounts because the investment must remain in the account for the entirety of the fixed term, or you run the risk of paying a fee or penalty. Because these accounts are less liquid than a traditional savings account, they offer a higher interest as an incentive.
• Money Market Accounts:these accounts are like a savings account, but often require a higher minimum balance, and different interest rates may apply to different account balances. However, unlike a savings account, money market accounts often have limits on the number of checks you can write each month – the maximum is usually 3 checks. You can make as many deposits and withdrawals as you want, though, by visiting a bank branch in person.

Pros of Investing In Financial Institution Products

• These investment accounts are some of the most liquid investment products, making it easy for you to get your funds for any reason.
• The barrier to entry is low, and it’s extremely easy to invest.
• Opening an investment account at a financial institution doesn’t require a lot of money.
• Your investments at a financial institution are insured by the government.

Cons of Investing in Financial Institution Products

• The interest you earn from bank products tends to be lower than potential returns from other investments.

2. Stocks

Investing in stocks means purchasing shares of ownership in a publicly traded company. By investing in a company’s stock, you’re hoping the company grows and performs well over time. When the company does perform well, your shares may become more valuable and other investors may be willing to buy them from you for more than you paid for them. If you decide to sell, you could earn a profit. Stock prices fluctuate often, so investing in the stock market is a long-term investment strategy.

Pros of Investing in Stocks

• Stocks are easy to purchase and can be relatively cheap to invest in.
• In terms of investment products, stocks are fairly liquid, meaning you can access your money relatively easily.
• Investingin the stock market is one of the best ways to stay ahead of inflation.

Cons of Investing in Stocks

• If a company does poorly, you could lose your entire investment.
• Researching companies to purchase stocks from takes time and financial acumen. The U.S. Securities and Exchange Commission is a great resource to begin your research.
• If you sell your stock for a profit, you’re liable to pay capital gains taxes.
• Because it is a long-term investment strategy, investing in stocks is not good for someone who needs money now.

3. Bonds

Bonds are investment securities where an investor lends money to a company or a government for a set period in exchange for regular interest payments. Once the bond reaches maturity, the bond issuer returns the investor’s money.

Types of Bonds

• Corporate Bonds:issued by companies for financing ongoing operations, new projects, acquisitions, or debt. Companies issue bonds rather than seek bank loans in many cases because bond markets offer more favorable terms and lower interest rates.
• Municipal Bonds: issued by states and municipalities. Some municipal bonds offer tax-free coupon income for investors.
• Government Bonds: issued by national governments to support government spending.
• Agency Bonds: issued by government-affiliated agencies like Fannie Mae or Freddie Mac.

Pros of Investing in Bonds

• With bonds, investors receive a fixed return in the form of interest payments.
• Compared to other investments, bonds are considered less risky because they are universally rated by agencies to give investors a clear understanding of exactly how much risk they will be taking on.
• You’ll receive better returns than keeping your money in financial institution products (like savings accounts or CDs).

Cons of Investing in Bonds

• You can anticipate lower returns with bonds than you would expect by investing in the stock market.
• Bonds are more costly than other investment products.
• Bond defaults can occur – if a company is in such a bad standing that it cannot pay back its debts, you may lose your investment.
• If you need cash now, bonds are not a great option because they are extremely low in liquidity.

4. Mutual Funds

Hand-selecting stock and bond options may be too in-the-weeds for some investors, so mutual funds are the perfect solution. Mutual funds allow you to purchase many different investments in a single transaction. These funds pool money from many investors, then employ a professional manager to invest the money in stocks, bonds, and other assets. How risky a mutual fund is depends on the investments within the fund.

Pros of Investing in Mutual Funds

• When you invest in mutual funds, you will rely on professional portfolio managers who buy and sell the investments on your behalf.
• Dividends and other interest income sources can be reinvested to purchase additional shares, therefore helping your investment grow.
• Because of the diversification of investments, the risk is substantially reduced.
• Mutual funds are easy to buy and easy to understand.

Cons of Investing in Mutual Funds

• Expense ratios, sales charges, and fees can be high, so it’s important to be cautious when investing.
• You’ll have to pay capital gains taxes when you receive distributions from the fund.
• Mutual funds are only traded once a day after the markets close.
  

5. Exchange-Traded Funds (ETFs)

Exchange-traded funds combine aspects of mutual funds and stocks. Like a mutual fund, ETFs are pooled investment funds that offer investors interest in a professionally managed, diversified investment portfolio. But unlike mutual funds, ETF shares are traded like stocks and can be bought or sold throughout the trading day at fluctuating prices.

Pros of Investing In ETFs

• When you invest in ETFs, you will rely on professional portfolio managers who buy and sell the investments on your behalf.
• Unlike mutual funds, ETFs are traded like stocks so investments can be bought or sold throughout the trading day.
• Because ETFs are passively managed, you can enjoy lower management fees.
• Dividends and other interest income sources can be reinvested to purchase additional shares, therefore helping your investment grow.

Cons of Investing in ETFs

• Costs are higher than investing in individual, specific stocks.
• Investing in ETFs results in lower dividend yields than investing in stocks.

6. Index Funds

Index funds are a type of mutual fund that passively tracks an index, rather than paying a manager to pick and choose investments. These funds are designed to mimic the composition and performance of a particular financial market index, like the S&P 500.

Pros of Investing in Index Funds

• Index funds are relatively low-risk options for investing.
• As far as your investments go, index funds are designed for long-term, steady growth.
• These investments offer lower fees for investors than non-index funds.
• Your investments are diversified in index funds.

Cons of Investing in Index Funds

• There is no floor to your losses.
• You don’t have the flexibility to choose the composition of the fund; you cannot add or remove any holdings.
• Generally, you cannot “beat” the market. You can only achieve market returns.

7. Options

Optionsare contracts that give the purchaser the right, but not the obligation, to buy or sell securities (like stocks or ETFs) at a fixed price within a specific period. When purchasing options, you’ll pay what’s known as a “premium” up front, which you will lose if you let the contract expire.

Pros of Investing in Options

• The cost of buying options (the premium plus the trading commission) is a lot less than what an investor would have to pay to purchase shares outright.
• Options give an investor time to see how things play out before investing.
• Unlike some other investment accounts, options protect investors from downside risk by locking in the price without the obligation to buy.

Cons of Investing in Options

• Options are more complicated than just purchasing stocks outright – you need to know what you’re doing.
• Potential traders must meet certain requirements: you must apply for approval through your broker – once you answer a series of questions about your financial situation, investing experience, and understanding of the inherent risks of options trading, the broker will assign you a trading level that determines what types of options trades you’re allowed to place. You must also keep a minimum of $2,000 in your brokerage account.
• With certain types of options trades, you can lose more than your initial investment.
• You can lose your entire investment in a relatively short period.

Further Resources on Traditional Investments

Here are some further resources on traditional investment types:

• The U.S. Securities and Exchange Commission (SEC) website has a section on investment products that covers traditional investments such as stocks, bonds, and mutual funds.
• The Financial Industry Regulatory Authority (FINRA) offers information on traditional investments. Their website contains a dedicated section on investing that includes informative content on various topics, including stocks, bonds, and mutual funds.
• The American Association of Individual Investors (AAII) provides research, education, and publications on traditional investments. They also offer a number of investment tools and resources for investors.

Choose your next (or first) investment!

Once you’ve investigated your options and assessed how each investment type would fit your needs and financial goals, you’re ready to invest!

A credit union investment product can be a great place to start. Credit unions typically have the best rates and lowest fees. Use our Credit Union Locator tool to find a credit union near you and discover all a credit union has to offer.