Investment types
Understand what types of investments may best align with your investment objectives. Our teams are well-equipped to help you achieve your financial goals.
Basic investment types
With all the thousands of stocks, bonds and funds available, how do you decide which investments will best meet your specific needs and goals? Let’s start by reviewing the basic investment types.
Mutual funds & ETFs
Many new investors start out investing with mutual funds and exchange-traded funds (ETFs) since they require smaller investment amounts to create a diversified portfolio.1
Mutual funds
Pool your money with the money of other investors to purchase tens or hundreds of different stocks, bonds or other investments. As the fund’s assets appreciate or depreciate, so too will the value of the shares you own. Mutual funds trade once each day (at market close) at that day’s net asset value (NAV).2 Shareholders are able to receive income and capital gains.
Exchange-Traded funds
Most exchange-traded funds (ETFs) are designed to track the performance of a particular market index (such as the S&P 500 or the NASDAQ 100), industry or sector. They function much like mutual funds but are priced continually throughout the day, so they can be traded like stocks.3
A note on fund taxes and fees:
Mutual fund distributions and capital gains are taxed each year whether you receive them in cash or reinvest them in the fund. ETFs, on the other hand, have no mandatory capital gains distributions. You only pay taxes on your profit when you sell a fund.
Make sure you also understand how fees are assessed before purchasing any mutual fund or ETF:
Load/No-Load funds
Funds are either sold with a ‘load,’ where you typically pay the broker a commission on your investment, or ‘no-load,’ where you purchase without a commission. Loads may be paid at the time of purchase or sale.
Management fees
Fees are used to pay the fund's portfolio manager for expertise in managing the fund. They are typically lower for passively managed funds than actively managed funds.
Other fees
Funds may also charge 12b-1 fees for marketing, fees to maintain an account, redemption fees to discourage short-term trading and/or exchange fees to move money between funds.
Stocks & Bonds
Stocks may outpace in one year, but then reverse in the next year. Or energy stocks may climb while technology stocks fall. In reality, the mix of investment types you choose will have far more impact on your portfolio performance than the specific individual investments you own.
Stocks
Shares of ownership in an individual company that can be traded on an exchange; their value will fluctuate based on the performance of the company.
Bonds
Debt obligations of a company, the government or a municipality; when you purchase an individual bond, you’re lending the issuer your money for a specific period of time, which they agree to pay back at a certain rate of interest.
Alternatives
When most investors think of alternative investments like hedge funds, commodities or real estate, the word ‘risky’ comes to mind. But, in actuality, because they often move in a different direction than traditional stocks and bonds (low correlation), adding alternatives to your investment mix may help:
- Minimize the impact of market volatility
- Increase your overall portfolio diversification
- Enhance your risk-adjusted returns
Cryptocurrencies & NFTs
As investing continues to evolve, cryptocurrency and NFTs have emerged as ways to integrate blockchain technology into new opportunities. Both of these assets, however, are speculative and subject to a high degree of volatility, so investors should be cautious when considering a portfolio allocation to either.
Cryptocurrencies
Fungible tokens, such as Bitcoin, can be exchange with each other at an equivalent rate, and therefore be traded or used as a medium for commercial transactions.
Non-Fungible Tokens (NFTs)
Are a different type of asset that leverages the unique identification codes and metadata associated with blockchain technology. NFTs are increasingly being used to represent digital ownership of both virtual and real-world items like artwork, photography, collectibles and real estate.
Sustainable & Impact Investing
Environmental, social and governance (ESG) factors play an important role in the portfolios of socially conscious investors. Thanks to today’s more sophisticated strategies and screening capabilities, you can better align your investments with your personal values without having to sacrifice significant return potential.
Sustainable Investing
A strategy of investing in companies with strong ESG scores based on the belief that those companies are more likely to thrive going forward.
Impact Investing
Investments made in firms focused on socially and environmentally worthy endeavors (such as affordable housing, healthcare and education, renewable energy and access to safe water) with the intent of creating both a positive impact as well as a financial return.
Investment risks
With any investment, the biggest risk is that you can lose money. While some investments are less risky than others, you pay for that added stability through lower rates of return. Before making any investment, understand its potential risks and rewards to determine if it's appropriate for you.
Visit the Investing Principles page for more information and steps to consider before you begin.
1 Diversification does not ensure a profit or guarantee against loss in declining markets.
2 Investing in mutual funds is subject to stock market volatility. You should carefully consider a fund’s investment objectives, risks, charges and expenses before investing. This and other important information is included in the fund’s prospectus, which should be read carefully before investing. Prospectuses can be obtained from your investment professional.
3 Exchange-traded funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. You should carefully consider the investment objectives, risks, charges and expenses before investing in this product. This and other important information is included in the prospectus, which should be read carefully before investing. Prospectuses can be obtained from your investment professional or through the investor’s sign-in area of bankofamerica.com/investments.
