Stocks are what most people think of when they think of investment, and they are a very simple proposal. You give up money in exchange for a portion of a company. If the company does well, you should be able to sell off the stock for more than you paid. If the company doesn’t, you’re going to sell it for less than you bought it for. Simple? It goes on. As a part owner of a company, the company can choose to issue a portion of their annual profits to their owners in the form of dividends. The more shares you have, the more you’re entitled to. And, of course, depending on the type of stock you have, you may be entitled as a shareholder to vote on issues relating to the company’s operation.
But the lion’s share of the money made on stocks and bonds is actually done through trading. There are plenty of things traders can do to get an edge, ranging from borrowing stocks and hoping to be able to buy them back later (legal), to using secret information to buy up stocks before they become valuable (super illegal).
Bonds are sometimes put in the same category as stocks, though really, they’re nothing alike. What you get in a stock comes up front—with stock, you get a piece of paper saying you own a certain percentage of a company. What you get from a bond is a piece of paper that says this company has borrowed a certain amount of money from you. In exchange for that money, they promise to pay you back a higher amount after a certain amount of years. Congratulations! You’re a loanshark!
Just like stocks which can be bought or sold, the core value in bonds is the promise of a payoff when the bond comes to term. Bonds are typically considered lower risk than stocks, because they’re typically only issued by reliable companies or federal governments—and as a result, they tend to promise a smaller return.
The safe, middle-America, white-picket-fence way to invest. You’ll never get rich enough to ride a private jet full of cocaine and supermodels, but you’ll also not go poor investing in a hedge fund. A hedge fund is private business, where a number of people pool their money to invest collectively. The fund is managed by a company who buys and sells stock year after year to ensure that the fund is diverse enough that it won’t ever be affected by a crash in one segment of the market, and profitable enough that the fund’s members don’t see the point in just pulling out and investing by themselves. The fund managers also pocket a nice fee for themselves.
They’re safe, they’re expected to perform slightly better than the market and you can add or withdraw money as you like.
The downside is that hedge funds truly are the safe, middle-America way to invest. Most funds require potential members to be worth at least $1 million, or own a significant amount of assets. They’ll also screen potential applicants, and some have said there’s a bit of a country club atmosphere among these funds, turning away anyone they consider unworthy. Let’s put it this way: DMX never got invited to join a hedge fund.
Another popular option is, of course, to just buy a business. But remember that owning a business can be a big money sink. Look at Bjorn Borg and his clothing line, or Michael Jordan’s first restaurant, or Antoine Walker’s real estate business. And speaking of real estate…
The old money in the world says that real estate is the most stable way to make your money. People are always going to need land to build on—right? It’s not that simple. The crash showed us that the real estate market can be a risky proposition, and expropriation of land by the government is a looming shadow, though it rarely happens.
However, despite what people may tell you, land can become devalued and it is not an easy investment. There’s much homework to be done before you can become a real estate mogul. What is the site considered for development zoned as? Who owns the land next to it? What are they planning to do with it? What does the city plan to do with the area surrounding the lot? Who owned the land before the current owners? Did they use it as an apple grove, or a scrap metal yard? All these are questions you should consider before buying land as an investment.
Most of the time people are talking about things like gold, silver, and other commodities that trade for high values. Unfortunately, your game-worn MJ shirt doesn’t count. The biggest issue with commodities like these is that they’re illiquid—they can’t be made into cash easily. And banks don’t accept yachts as payment. Just ask Latrell Sprewell.