7 Types of Long-term Investments (and How they Work)

what is compound interest and how does it work security bank philippines

As an investor, you’d be surprised with just how many options you have on where to put your money. 

Before you start investing it’s important to know what type of investment you’ll be going for and, more importantly, how you’ll earn from those investments. 

Here are 7 types of investments that you can consider for investing and growing your money for the long term.

Stocks


A stock is an investment in a specific company. By purchasing a stock an investor is essentially buying a share – a small piece – of the company’s earnings and assets. Stocks are offered by companies as a means of raising cash; the investors, in turn, can buy and sell those shares among themselves. 

Stocks are among the medium-to-high risk investments because though there is a potential for high returns the fate of a stock is entirely dependent on the performance of the company and it is possible that it can go out of business.

How can investors make money?

Stock investors make money when the value of the stock they own goes up and they’re able to sell that stock for a profit. Some stocks also pay dividends, which are regular distributions of a company’s earnings to investors.

Additional Reading: 10 Blue Chip Companies to add to your Investment Portfolio

Bonds


Bonds are loans you give to a company or government. When you purchase a bond, you are allowing the bond issuer to borrow your money and pay you back with interest. Compared to most investments, bonds are generally considered less risky than stocks, however, it is because of this that they tend to offer lower returns. The main risk the investor should consider is the possibility that the issuer could default. 

Bonds are generally categorized into three:

  • Corporate bonds are debt instruments issued by a company to raise capital for initiatives like expansion, research, and development. The interest investors earn from corporate bonds is taxable. But corporate bonds usually offer higher yields than government or municipal bonds to offset this disadvantage.
  • Municipal bonds are issued by a city, town, or state to raise money for public projects such as schools, roads, and hospitals. Unlike corporate bonds, these are often given tax incentives-even exemptions in some instances- due to their proven role in improving the local economy.
  • Treasury bonds (also known as T-bonds) are issued by the Philippine government. Since they’re backed by the government, treasury bonds are considered risk-free. Take note, however, that because of its almost-no-risk nature, treasury bonds don’t yield interest rates as high as corporate bonds.

How can investors make money

Bonds are fixed-income investments because investors expect regular income payments. Interest is generally paid to investors in regular installments — typically once or twice a year — and the total principal is paid off at the bond’s maturity date.

Life Insurance


Life insurance is an investment you get not for yourself but for others who depend on you. The concept is simple: When something happens to you (that ‘something’ depends on the insurance you got), the named beneficiaries will receive the benefit of the plan. Usually, the beneficiary is the closest family member.

During a world-wide pandemic, having a backup plan for your family may be one of the most practical investments you can get. This is especially true if you live in a high risk community or doing work on the front lines.

How can investors make money?

To maximize your earning potential, you can get a life insurance that doubles as an investment. VULs or Variable Life Insurance pretty much gives you that: a cash-value life insurance that has both death benefit and investment features.

The investment feature works like a mutual fund wherein the cash value can be invested in a variety of separate accounts. Insurance companies like FWD offer different types of VUL that’s tailor-fit to your needs, with flexible term options, loyalty bonuses and optional add-ons to choose from. Check out their VUL options here.

Tip: Insurance companies can help you design a comfortable investment plan that fits your budget. Set aside 10, 15, or 20% of your salary to fulfill insurance premiums.

Mutual Funds


If the idea of picking and choosing individual bonds and stocks does not appeal to you, there is also the option of investing in Mutual funds. Through Mutual Funds, investors are able to purchase large investments in a single transaction. These funds, in turn, pool money from multiple investors and are managed by a professional fund manager to invest that pooled fund in stocks, bonds, and other assets. 

Mutual funds follow a set strategy – a fund might be invested in a specific type of stocks or bonds, like stocks in a foreign market or government bonds, or even a mixture of the two in a single fund. The point is, each fund has a specific objective, the beauty of mutual funds is that investors are given the option to choose which fund to invest in based on their goals. 

How can investors make money?

When a mutual fund earns money — for example, through stock dividends or bond interest — it distributes a proportion of that to investors. When investments in the fund go up in value, the value of the fund increases as well, which means you could sell it for a profit. Note that you’ll pay an annual fee, called an expense ratio, to invest in a mutual fund.

Index Funds


Index funds are a type of investment that passively tracks an index rather than having managers actively pick and choose investments. Index Funds are more common in other countries due to having more than one index present (ex. Dow Jones, S&P 500 among others). In the Philippines however, only one index is present, the Philippine Stock Exchange Index. What happens here is that the PSEi Index fund will aim to mirror the performance for the PSEi index by holding stock of the companies listed within that index. 

The benefit of index funds is that they tend to cost less because they don’t have active managers on the payroll. The risk associated with an index fund will depend on the investments within the fund.

How can investors make money?

Index funds may earn dividends or interest, which is distributed to investors. These funds may also go up in value when the benchmark indexes they track go up in value; investors can then sell their share in the fund for a profit. Index funds also charge expense ratios, but as noted above, these costs tend to be lower than mutual fund fees.

Exchange Traded Funds


ETFs are a type of index fund, wherein they track a benchmark index and aim to mirror that index’s performance. Like index funds, they tend to be cheaper than mutual funds because they are not actively managed.

The major difference between index funds and ETFs is how ETFs are purchased: They trade on an exchange like a stock, which means investors can buy and sell ETFs throughout the day and an ETF’s price will fluctuate throughout the day. Mutual funds and index funds, on the other hand, are priced once at the end of each trading day — that price will be the same no matter what time you buy or sell.

How can investors make money?

As with a mutual fund and an index fund, your hope as an investor is that the fund will increase in value and you’ll be able to sell it for a profit. ETFs may also pay out dividends and interest to investors.

Options


An option is a contract to buy or sell a stock at a set price, by a set date, which in turn flexibility as the contract doesn’t actually obligate you to buy or sell the stock. As the name implies, doing so is an option. Most options contracts are for 100 shares of a stock.

It’s important to remember that when buying an option, you are buying the contract, not the stock itself. You can then either buy or sell the stock at the agreed-upon price within the agreed-upon time; sell the options contract to another investor; or let the contract expire. 

How can investors make money?

Compared to the others mentioned on this list, Options are considerably more complicated, but at a basic level, you are locking in the price of a stock you expect to increase in value. With Options, assuming everything goes well, you benefit by purchasing the stock for less than the going rate. If it is wrong, you can forgo the purchase and you’re only out the cost of the contract itself.

Investments can come in many forms, each with its own advantages and disadvantages. Just remember, when choosing an investment make sure to have a clear goal for what you want to achieve and, as always, do your research. 

Additional Reading: 10 Things to Consider Before You Start Investing

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