WHAT ARE ALTERNATIVE INVESTMENTS?
Alternative investments are asset classes that aren’t stocks, bonds, or cash. These kinds of investments differ from traditional investment types because they aren’t easily sold or converted into cash. It’s also common for alternative investments to be referred to as alternative assets. One of the most dynamic asset classes, alternatives cover a wide range of investments with unique characteristics. Many alternatives are becoming increasingly accessible to retail, or individual, investors—making knowing about them increasingly important for all types of investors and industry professionals. These types of investments can vary wildly in their accessibility and structure, but they share a few key characteristics: • They're more lightly regulated by the US Securities and Exchange Commission (SEC) than traditional investments. • They're illiquid, meaning they can’t be easily sold or otherwise converted to cash. • They have a low correlation to standard asset classes, meaning they don’t necessarily move in the same direction as other assets when market conditions change. While alternative investments share these key traits, they're also a diverse asset class. Here are seven types of alternative investments everyone should know, what makes them unique, and how to think about them as investment opportunities.
7 KINDS OF ALTERNATIVE INVESTMENTS
1. Real Estate Investments
What It Means: Real estate is about buying property, like houses or buildings, to make money from renting them out or selling them later for a higher price.
How You Can Invest: • Buying Property: Owning buildings or land and earning money from tenants who rent them. • REITs: Investing in companies that own and manage real estate properties. It's like buying shares in these companies. • Real Estate Crowdfunding: Joining with other people to invest in big real estate projects through websites. You don't need as much money to get started.
Why It's Good: Real estate can give you steady income from rent and the chance for your property's value to go up over time.
2. Private Equity
What It Means: This is about investing in companies that are not traded on the stock market. It's usually for big investors who can afford to put a lot of money into these companies.
How You Can Invest: • Buying Companies: Taking control of businesses to make them more profitable. • Venture Capital: Investing in new companies that have big growth potential, like tech startups.
Why It's Good: If these companies do well, you can make a lot of money. But it's risky because not all companies succeed.
3. Venture Capital
What It Means: This is like private equity but focuses on new and small companies that are just starting out.
How You Can Invest: • Investing Early: Giving money to startups to help them grow in exchange for a share in their success. Why It's Good: If a startup becomes successful, your investment can grow a lot. But many startups fail, so it's a risky bet.
4. Hedge Funds
What It Means: Hedge funds are like investment pools where big investors put their money. They use advanced strategies to try and make more money than regular investments.
How You Can Invest: • Joining a Fund: Putting your money with others to be managed by experts who use different ways to make profit. • Using Different Strategies: They can bet on stocks going up or down, or use other methods to make money.
Why It's Good: Hedge funds can make big profits, especially when markets are uncertain. But they can also lose money, and they charge high fees.
5. Commodities
What It Means: Commodities are things like gold, oil, or food that people use every day. Investing in these means betting on their prices going up or down.
How You Can Invest: • Buying Directly: Owning physical commodities like gold bars or oil barrels. • Through Investments: Buying funds that track the prices of commodities.
Why It's Good: Commodities can protect your money during inflation and have different value changes than stocks and bonds.
6. Collectibles
What It Means: This is about investing in rare or valuable items like art, coins, or vintage cars.
How You Can Invest: • Buying Valuable Items: Finding unique things that can go up in value over time.
Why It's Good: Collectibles can be a fun way to invest and they often increase in value over time. But it's important to know a lot about what you're buying.
7. Cryptocurrencies
What It Means: Cryptocurrencies are digital money like Bitcoin or Ethereum that use technology called blockchain. How You Can Invest: • Buying Coins: Purchasing cryptocurrencies to hold and sell later if their value goes up. • Using Technology: Investing in blockchain projects that offer new financial services.
Why It's Good: Cryptocurrencies can grow very fast in value, but they can also lose a lot of value quickly. It's a high-risk, high-reward investment.
THE BENEFITS OF ALTERNATIVE INVESTMENTS
Alternative investments offer greater portfolio diversification and lower overall risk with the potential for higher returns. As alternative investments become a larger part of the investing landscape and more available to different types of investors, they're increasingly important to know about for both investors and current or aspiring investment professionals hoping to accelerate their careers.
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