The risk of each type of investment is different. Here’s a look at investment risk from the least risky to what is often considered the riskiest assets:
— Cash and Cash Equivalents
Cash and equivalents to cash are generally considered the safest way to keep your money. Savings accounts, bank CDs, and money market savings accounts offer a modest interest rate and generally come with FDIC insurance. Money market funds (different from money market savings accounts) and U.S. Treasury bills are often considered to be cash equivalents that carry extremely low risk.
— Bonds and Fixed-income Assets
Government and corporate bonds are a type of fixed-income investment. These assets offer a fixed, predictable income until they mature. Bonds are generally considered lower risk. However, it’s wise to note that within the world of bonds, there are different risk levels. Ratings by agencies like Moody’s or Standard & Poor’s help you weed out “investment grade” bonds (usually any bond rated between AAA and BBB) from “junk” bonds (any bond rated BB or lower).
— ETFs and Mutual Funds
ETFs and mutual funds are diverse investment vehicles. With either of these types of funds, you can buy a diverse set of stocks, bonds, or other assets with one investment purchase. Note that the fund’s assets may be risky on their own, so there are definitely less-risky and more-risky funds within this asset class.
— Individual Stocks
Stocks may be the best-known type of investment. Shares of stock give you a small slice of ownership in a company. The price goes up and down with company performance and may also follow the overall market performance. Single stocks are considered risky by some investors but not others. This is because of the perceived volatility of single stocks. It’s important to understand that, like other assets, some stocks are riskier than others.
Options are a type of derivative. (A derivative is a type of asset that gets its value from another asset.) Options generally give you the right (but not the obligation) to buy or sell a specific asset at a specific price before a specific future date. Expert investors use options to lower risk in their portfolios. However, options trading is generally a risky way to invest.
— Penny Stocks
Did you read this and think, “Wait, we already talked about stocks”? Well, you’re right. But penny stocks deserve their own mention when it comes to risk. Investing in penny stocks is riskier than investing in higher-priced stocks for several reasons. They are generally more volatile and less liquid and are susceptible to price manipulation from bad actors in the investment world. Many investors consider penny stocks to be more of a gamble than an investment, and they have an excellent point.
Futures are a type of investment that works similarly to options but with an important difference. Options give you a choice to buy or sell an asset on a future date. Futures require the owner to exercise the contract on the maturity date. For example, futures are popular with airlines that know they will need fuel in the future. For individual investors, however, these contracts carry a lot of risks.
Foreign exchange is the buying and selling of foreign currencies. Currencies are very volatile and trade around the clock. Relative currency prices can take big swings based on government actions, economic reports, and other less-predictable situations. That makes them among the riskier assets to buy and sell.
This is not an exhaustive list but covers the majority of investments most people will come across.