Five Alternative Investments: When most people think about investing, stocks, bonds, and cash are usually the first things that come to mind. Alternative investment news covers various topics, from hedge funds and private equity to real estate investing. This type of news can benefit investors looking to diversify their portfolios or find new opportunities.
But besides the traditional stock market, there are other types of investments that you can make. However, that is only one piece of the puzzle. The term “alternative investments” refers to an additional type of investment apart from traditional investment options.
What Are Alternative Investments?
Alternative investments consist of asset classes outside stocks, bonds, and cash. These assets vary from ordinary investments because they are difficult to sell or convert into cash.
The alternatives asset class is one of the most dynamic asset classes since it covers a wide variety of assets, each of which has distinctive qualities. Because more and more alternative investments are accessible to retail or individual investors, it is becoming increasingly vital for all sorts of investors and industry experts to know about these alternatives.
The accessibility and structure of these investments can vary widely, but they all have a few essential things in common, including the following:
- The United States Securities and Exchange Commission has no authority over them.
- They are considered illiquid, meaning they cannot be quickly converted into cash by selling or any other means.
- Since they have a poor correlation with traditional asset classes, they do not typically move in the same way as other securities when market conditions change.
Even though alternative investments have these fundamental characteristics, the asset class varies.
We will look at five distinct alternative investments, including what sets them apart from other forms of investments. Also, we will take you through how you can evaluate them as potential financial prospects.
Alternative Investments
1. Real Estate
There are a wide variety of forms that real assets can take. Real assets include land, timberland, and farms. Intellectual property, such as artwork, is also considered a real asset. Honestly, real estate is the most widespread form and the most important asset class in the world.
Pros
- Real estate is exciting because it is similar to bonds and stocks. Like bonds, property owners get cash flow from tenants paying rent. And like stocks, the goal of real estate is to increase its long-term value, which is called capital appreciation.
Cons
- One challenge that you can face in real estate investment is the valuation of the property. Property valuation requires vast knowledge and a solid understanding of when and how to apply various methodologies, thus making it hard to invest in real estate.
2. Commodities And Futures
In addition to being actual assets, commodities are almost often natural resources. Examples of commodities include agricultural goods, oil, natural gas, precious and industrial metals, etc.
Pros
- Because of the insensitivity of commodities to the performance of public equities markets, investors view them as a hedge against inflation.
- More robust demand for commodities leads to higher prices, resulting in more profits for investors.
- In addition, the value of commodities fluctuates up and down depending on their supply and demand.
Cons
- Contrary to equities and fixed income, commodities are not assets that generate revenue, and as a result, they do not pay any dividends or interest.
- Throughout history, commodities and futures have been the asset class with the highest level of volatility.
3. Cryptocurrencies
Cryptocurrencies are an unstructured form of digital currency which is not backed by any physical assets or securities. Examples of cryptocurrencies include Bitcoin. They are traded between parties that have already consented to the transaction, and the transaction is logged on digital ledgers.
Pros
- Cryptocurrency offers a high degree of liquidity, which can be easily converted into cash.
- Additionally, crypto assets are often immune to inflationary pressures, as their supply is limited. This makes them an interesting alternate investing option for those looking to preserve their wealth.
Cons
- On the downside, however, cryptocurrency is notoriously volatile, and prices can swing wildly from one day to the next. It is a risky investment for those not prepared to lose money.
- Additionally, the lack of regulation in crypto means potential fraud and scams.
Overall, though, investing in cryptocurrency can be a lucrative way to grow your wealth – but only if you are willing to take a risk.
4. Peer-To-Peer Lending
Peer-to-peer lending, often known as P2P lending, is a type of financial technology that eliminates the need for individuals to go through banks to lend or borrow money.
Rather people just do these transactions with another individual they most likely know. Even in the current climate of low-interest rates, this alternative asset provides desirable returns both in absolute terms and in the level of risk involved.
Pros
- P2P lending often gives investors more significant returns than other forms of investing.
- For some borrowers, peer-to-peer lending is a more accessible finance source than traditional loans from financial institutions. This may be due to the borrower’s poor credit score or the loan’s atypical purpose.
Cons
- The government provides no insurance or protection to lenders in the event of failure.
- In certain areas, peer-to-peer lending is prohibited, and organizations offering such services must comply with investment restrictions. Therefore, specific borrowers and lenders may not have access to peer-to-peer financing.
5. Angel Investing
Angel investing has become a popular alternative to traditional investing for all the right reasons! Angel investors are typically wealthy individuals who finance small business ventures in exchange for equity.
Pros
- In angel investing, you get an opportunity to be one of the first people to invest in a new and innovative company. This means that you can potentially see a high return on your investment if the company is successful.
- You also have the chance to help a new business get off the ground and grow. This can be an advantageous experience, both financially and emotionally.
- As an angel investor, you can often negotiate better terms for your investment than if you were investing in a more established company. This means that you can potentially make a higher return on your investment.
Cons
- It is risky to invest in a startup. If you have a lot of money, there are better ways to make money that are less risky.
- Investing in a startup takes time, not just money. You need to do your research and meet the founders and other investors. That will help you become part of the community.
In Closing
So, there you have it! Five alternative investments to get you started on your investing journey. We hope this was helpful and provided some new ideas for you.
If alternative investment interests you, do not wait anymore and start soon!
