The basic places to invest money

When you have money to invest, you are choosing between a few broad categories: savings accounts and certificates of deposit (which are safe but pay very little), bonds (which are loans you make to governments or companies), stocks (which are pieces of ownership in companies), and mutual funds or exchange-traded funds (which bundle stocks or bonds together so you own many at once). Each one works differently, pays you differently, and carries different risk that your money could shrink.

The choice between them depends on three things: how long you can leave the money alone, how much you can afford to lose, and what you are saving for. Someone saving for retirement in 30 years can take more risk than someone who needs the money in two years. Someone with only one month's expenses in savings should not put it in stocks. Someone saving for a house down payment in five years has different needs than someone investing extra money they will not touch for decades.

Key Takeaways

  • Savings accounts and CDs are the safest places to put money, but they pay interest rates that barely keep up with inflation.
  • Bonds are loans you make to governments or companies; they are safer than stocks but riskier than savings accounts, and they pay a fixed amount of interest.
  • Stocks are pieces of company ownership; they can grow quickly or shrink quickly, and they are riskier than bonds or savings accounts.
  • Mutual funds and ETFs let you own many stocks or bonds at once instead of picking individual ones, which spreads your risk across many companies.
  • The right choice depends on when you need the money, how much you can afford to lose, and what you are saving for.

Savings accounts and certificates of deposit

A savings account is the safest place to put money. Your bank holds it, insures it up to $250,000 through the Federal Deposit Insurance Corporation (FDIC), and pays you a small amount of interest. You can take the money out whenever you want. The tradeoff is that the interest rate is very low—often less than 1 percent per year at traditional banks, though online banks sometimes pay higher rates.

A certificate of deposit (CD) is a deal where you agree to leave money in the bank for a set time—three months, one year, five years, or longer. In exchange, the bank pays you a higher interest rate than a savings account. If you take the money out early, you pay a penalty. CDs are still insured by the FDIC, so your money is safe. They make sense if you know you will not need the money for a specific amount of time.

Both are good places to keep money you need to stay safe—an emergency fund, money for a down payment in the next year or two, or money you are saving for something specific. They are not good for long-term investing because the interest is so low that inflation eats away at what your money can buy.

Bonds: lending money to governments and companies

A bond is a loan. When you buy a bond, you are lending money to a government or a company. They promise to pay you back the amount you lent (called the principal) plus interest (called the coupon) on a set schedule. A government bond might pay 4 percent per year for 10 years. A company bond might pay 5 percent per year for 5 years. You know exactly how much you will be paid and when.

Bonds are safer than stocks because you get paid before stockholders do if a company runs into trouble. But they are riskier than savings accounts because the company or government could fail to pay you back. The interest rate a bond pays depends on how risky it is: a bond from a stable government pays less than a bond from a shaky company, because investors demand higher payment for taking on more risk.

Bonds make sense if you want more return than a savings account but do not want the ups and downs of stocks. They work well for money you will need in five to ten years, or as part of a mix of investments. Most people do not buy individual bonds; instead they buy bond funds, which hold many bonds at once.

Stocks: owning pieces of companies

A stock is a piece of ownership in a company. When you buy stock, you own a tiny fraction of that company. If the company does well, the stock price usually goes up and you can sell it for more than you paid. If the company struggles, the price goes down. You might also receive dividends—small payments the company makes to shareholders from its profits—but not all companies pay them.

Stocks are riskier than bonds or savings accounts because prices move up and down constantly, sometimes by a lot. A stock you buy for $100 might be worth $150 in a year or $50. Over long periods—10, 20, or 30 years—stocks have historically gone up more than bonds or savings accounts, but there is no may provide. If you need the money in two years and the market drops, you might have to sell at a loss.

Stocks make sense for money you will not need for at least five to ten years, and ideally longer. Most people do not pick individual stocks; they buy stock funds instead, which own many companies at once. This spreads the risk so that one company's bad year does not wreck your investment.

Mutual funds and exchange-traded funds

A mutual fund is a pool of money from many investors that a professional manager uses to buy stocks, bonds, or both. Instead of picking 50 individual stocks yourself, you buy one mutual fund that owns 50 stocks. The fund manager decides what to buy and sell. You pay a fee—usually between 0.5 and 2 percent of your money per year—for the manager to do this work.

An exchange-traded fund (ETF) is similar but works differently. Instead of a manager picking what to buy, most ETFs follow a set list—for example, "all 500 large U.S. companies" or "all bonds rated investment-grade." You buy and sell ETF shares like stocks, during market hours. Fees are usually lower than mutual funds, often 0.1 to 0.5 percent per year.

Both let you own many companies or bonds without picking them yourself. Mutual funds are good if you want someone else to make decisions. ETFs are good if you want lower fees and more control over when you buy and sell. For most people starting out, a simple index fund or ETF that tracks the whole stock market or bond market is a better choice than trying to pick individual stocks or paying for an active manager.

How to think about risk and time

The longer you can leave money invested, the more risk you can take. If you are investing for retirement 30 years away, a drop in stock prices is not a problem—you have time to wait for them to recover. If you need the money in two years, a big drop could force you to sell at a loss. This is why young people often have more stocks in their investments and older people have more bonds.

Your comfort with risk also matters. Some people sleep well at night knowing their money might drop 20 percent in a bad year. Others panic and sell everything, locking in losses. If you are the second type, you should have more bonds and savings accounts, even if it means lower long-term returns. Losing sleep is not worth an extra 1 percent per year.

A common approach is to split your money across all four categories: keep three to six months of expenses in a savings account for emergencies, put money you need in the next few years in CDs or bonds, and put money you will not need for ten years or more in stocks or stock funds. This way, you are not betting everything on one outcome.

Where to actually open an account and invest

You can invest through a bank, a brokerage firm, or an investment company. Banks offer savings accounts, CDs, and sometimes mutual funds. Brokerages like Fidelity, Charles Schwab, or Vanguard let you buy stocks, bonds, ETFs, and mutual funds. Some brokerages have no minimum balance and charge no fees to buy or sell. Others charge per trade or require you to keep a certain amount of money in the account.

If you have a job, your employer might offer a 401(k) or similar retirement plan. This is often the best place to start investing because the employer may match part of what you contribute, and the money grows tax-free until you retire. If you do not have a workplace plan, you can open an Individual Retirement Account (IRA) at any brokerage.

Before you open an account anywhere, compare the fees. A difference of 0.5 percent per year sounds small but compounds over decades. On $10,000 invested for 30 years, the difference between 0.5 percent and 1.5 percent in fees is tens of thousands of dollars in lost growth.

Frequently Asked Questions

What is the safest place to put money?

A savings account or CD at a bank insured by the FDIC. Your money is protected up to $250,000 and you cannot lose it. The tradeoff is that interest rates are very low, so inflation eats away at what your money can buy over time.

Can I lose money in bonds?

Yes, though it is less common than with stocks. If you hold a bond until it matures, you get your money back. But if you sell a bond before maturity, its price may have dropped. Also, if the company or government that issued the bond fails, you might not get paid back at all.

Do I need a lot of money to start investing?

No. Many brokerages have no minimum balance. You can start with $100 or even $50 in a stock fund or ETF. The key is to start early so your money has time to grow, even if you are investing small amounts.

Should I pick individual stocks or buy a fund?

For most people, a fund is better. It spreads your risk across many companies so one bad stock does not hurt you much. Picking individual stocks requires time, research, and emotional discipline. Most professional stock pickers do not beat the market over long periods, so the odds are against you.

What if the stock market crashes after I invest?

If you do not need the money for years, a crash is actually good—your regular investments buy more shares at lower prices. If you need the money soon, you should not have it in stocks. This is why matching your investment type to when you need the money matters more than trying to time the market.