# Understanding Investment Vehicles: Types and Benefits Explained

## What Is an Investment Vehicle?

An investment vehicle is a product used by investors to gain positive returns. Investment vehicles can be low risk, such as [certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CDs) or bonds, or they can carry a greater degree of risk, such as stocks, options, and futures. Other types of investment vehicles include annuities; collectibles, such as art or coins; mutual funds; and [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs).

### Key Takeaways

*   Investment vehicles are tools used by investors to achieve positive financial returns.
*   Different investment vehicles come with varying levels of risk and reward, from low-risk bonds and CDs to higher-risk stocks and options.
*   Diversification, which involves holding various types of investments, can help minimize risk and potentially increase long-term returns.
*   Ownership investments include stocks and real estate, wherein the investor directly owns assets expecting appreciation.
*   Pooled investment vehicles allow multiple investors to combine their resources to access opportunities typically unavailable individually.

## Understanding Investment Vehicles

Investment vehicles refer to any method by which individuals or businesses can invest and, ideally, grow their money. There are many types of investment vehicles, and investors often hold various ones in their [portfolios](https://www.investopedia.com/terms/p/portfolio.asp). Holding [various types of investments](https://www.investopedia.com/terms/d/diversification.asp) in a portfolio reduces risk and typically leads to better long-term returns.

## Exploring Different Types of Investment Vehicles

The different types of investment vehicles are subject to regulation in the jurisdiction in which they are provided. Each type of investment vehicle comes with its own risks and rewards. Choosing the right investment vehicles depends on an investor's market knowledge, investing skills, [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), and financial goals.

### Delving Into Ownership Investments

Investors who delve into ownership investments own particular assets that they expect to grow in value. Ownership investments include stocks, real estate, collectibles, and businesses. Stocks, also called equity or shares, give investors a stake in a company and its profits and gains. Real estate owned by investors can be rented or sold to provide higher net profits for the owner. Precious objects such as collectibles, art, and precious metals are considered ownership investments if they are sold for a profit. Capital used to build businesses for profit is another type of ownership investment.

### Exploring Lending Investments

Lending investments involve allowing others to use your money with the expectation of repayment. The lendor typically charges interest on the loan so that they earn a profit once the loan is repaid including the interest charges. This type of investment is low risk and provides low rewards. Examples of lending investments include [bonds](https://www.investopedia.com/terms/b/bond.asp), certificates of deposit, and [Treasury Inflation-Protected Securities](https://www.investopedia.com/terms/t/tips.asp) (TIPS).

Investors investing in bonds allow their money to be used by corporations or the government with the expectation it will be paid back with profit after a set period with a fixed interest rate.

Certificates of deposit (CDs) are offered by banks. A CD is a [promissory note](https://www.investopedia.com/terms/p/promissorynote.asp) provided by banks that locks the investor's money in a savings account for a set period with a higher interest rate.

TIPS are U.S. bonds designed to protect against inflation. Investors who put their money in TIPS get their principal and interest back when their investment matures over time. Both principal and interest are indexed for inflation.

### Understanding Cash Equivalent Investments

[Cash equivalents](https://www.investopedia.com/terms/c/cashequivalents.asp) are investments almost as liquid as cash. These are savings accounts or money market funds. The investments are liquid but have low returns.

### Investigating Pooled Investment Vehicles

Investors often pool their money for advantages they can't get alone, creating pooled investment vehicles like mutual funds, pension plans, [unit investment trusts](https://www.investopedia.com/terms/u/uit.asp) (UITs), and [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp). 

In a mutual fund, a professional fund manager chooses the type of stocks, bonds, and other assets that should compose the client's portfolio. The fund manager charges a fee for this service. 

A pension plan is a [retirement account](https://www.investopedia.com/terms/i/ira.asp) established by an employer into which an employee pays part of their income. 

Private funds are composed of pooled investment vehicles, such as hedge funds and private equity funds, and are not considered investment companies by the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC). 

Unit investment trusts provide a fixed portfolio with a specified period of investment. The investments are sold as redeemable units. 

Hedge funds group together client money to make what are often risky investments using a long and [short](https://www.investopedia.com/terms/s/short.asp) strategy, leverage, and exotic securities in the aim of achieving higher than usual returns known as alpha. 

## The Bottom Line

Investment vehicles come in various forms, ranging from low-risk options like bonds and CDs to high-risk investments such as stocks and hedge funds. Each vehicle carries its own risks and rewards, making it crucial for investors to understand them to build a diversified portfolio that aligns with their financial goals and risk tolerance. Consulting with a financial advisor can help tailor an investment strategy best suited for an individual's current financial standing and future objectives.