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How investment accounts can make you money
Get financial security and stability by generating capital gains.
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Financial institutions tailor different investment accounts to suit different investor types and classes. A high-risk investment has the potential for the highest gains, but also for the highest losses.
How do investment accounts work?
An investment account can be any number of accounts that give you a return. Investment accounts include: brokerage accounts, pension accounts, certificates of deposit, and retirement accounts such as a 401(k) or IRA. You can also choose from direct investment accounts that act as a hybrid savings account and brokerage account. Investment accounts present different risks and returns, and investment accounts are often tailored to different types of investors.
What are the different types of investment accounts?
Investment account is an umbrella term that includes a number of different financial products. Common investment account types include:
- Brokerage accounts. Also known as stock trading accounts, brokerage accounts typically offer the widest range of investment options and are suitable for both short-term traders and long-term investors.
- Robo-advisors. These accounts are often more limited in selection but offer the benefits of modern technology and lower costs than financial advisors.
- Certificates of deposit. One of the safest ways to invest your money, a CD gives a higher return when you lock your money away for longer periods. There’s a penalty if you want to access your money before the term matures and there can be bonuses if you continue to invest your money once the first investment matures.
- Money market accounts. A money market account is also called a high-interest savings account. Like a CD, this investment account gives you a guaranteed return on your deposit. However, you don’t have to commit your money to the account for a specific period of time
- Retirement accounts. The most common options include 401(k), Roth IRA and traditional IRA accounts. Unlike a pension plan, these retirement accounts let you decide how your money will be invested.
- Pension plans. This is a retirement plan set up by a company for an employee. The investment choices in a pension plan are made entirely by the company — the recipient of the pension has little to no control over how the money is invested.
- Education accounts. These accounts help fund education. A 529 college savings plan lets you save for your child’s education by investing in stocks, mutual funds, ETFs and other securities. Savings grow tax-free on a federal basis, and withdrawals for qualified educational expenses are also tax-free. Some states allow tax deductions or credits based on your contributions.
Another option is a Coverdell Educational Savings Account (ESA). These are custodial or trust accounts meant to help you save for your child’s K-12 or college education. Withdraws for qualified educational expenses are tax-free. But you can only contribute up to $2,000 per beneficiary per year.
- Custodial accounts for kids. You can set up a type of brokerage account to benefit your child and transfer its assets when your kid reaches age 18 or 21, depending on state laws. Prior to that age, you maintain control of the account.
Two examples of these accounts include the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). With a UGMA, you can invest in basic securities like stocks, bonds and mutual funds. A UTMA can hold additional assets like real estate.
What are the pros and cons of using an investment account?
- Financial gain. Different investments and investment accounts have the potential for different gains. The potential for capital gains is tied to the risk of the investment.
- Choice. These types of accounts give you control over how you spend your money.
- Risk. The risk of suffering a capital loss.
- Not for everyone. You need to do your homework and spend time researching before you start investing to find the right investment account for you.
How do I compare investment accounts?
Consider these points when you compare investment accounts:
- Risk profile. Riskier investments give greater returns. Savings accounts and certificates of deposit are among the safest types of investments, whereas stock trading has the potential for big gains and losses.
- Your investment goals. Access to capital and risk appetite are two important factors in deciding your investment goals and subsequently which investment account is right for you. For example, a high-interest saving account is a better investment account for someone saving for their first home than a brokerage account. Stock trading can lead to big gains, but the chance of losing everything probably won’t appeal to someone saving for a mortgage.
- Your investment strategy. You can hedge your bets by choosing the right mix of high- and low-risk investments. Using a variety of account types to diversify your investment portfolio is a common strategy.
- The length of the investment. Are your investment goals short, medium or long term? Different investments have different investment cycles. For example, you need to pick the term length for a certificate of deposit before investing, while stocks can be a little more flexible. Your goals and time frame to realize those goals should help you make a decision about the best account for you.
- Liquidity. Also compare different investment accounts based on how easily you can access your money. Savings accounts are among the most liquid type of investment account — you can get your money when you want it. Securities only become a liquid asset if you can find a buyer.
Compare investment accounts
Brokerage accounts let you trade stocks and a wide variety of equity investments.
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Investments come with risks — there’s no way around that. The amount of risk varies depending on the investment type. CD and money market accounts have very little risk — worst case scenario is that the interest rate dips below the inflation rate — but also small returns. On the other hand, investing in stocks means that you could lose most, or even all of your money — or you could increase it exponentially. It’s up to you to decide what kind of risk, if any, you’re willing to take.
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