In the world of investing there really has never been a moment in time that offered more opportunity to investors than right now. If fact there is so much opportunity that it can be overwhelming at times. Let's take the time to explain the different categories of investments and why you might consider adding them to your portfolio.
To start, we're not going to say "categories" anymore. To look cool in front of your friends (and anyone in the financial space) we're going to call these categories "Asset classes". Now, each of these asset classes exposes you to different groups of securities.
First we have "Equities" or stocks. This represents a partial ownership of a company. When you buy stock you have the right to vote on some of the companies decisions. You also have the right to receive dividends if the company pays them. This is just a payment given by the company that represents a portion of their earnings. As a shareholder you are entitled to these dividends, and they do add up over time. Most people don't choose Equities for the dividend though. They invest for the overall appreciation of the stock's value, also known as capital appreciation. They hope to buy low and sell high.
The next asset class is commodities. One of the main reasons a portfolio manager would add commodities to a portfolio is correlation, or the lack there of. See, usually commodities move in the opposite direction of equities, along with fixed income which we will get to in a second. The challenge used to be that one could not purchase a commodity like oil and expect to store barrels of oil all over their house. But with futures contracts and now ETF's, investing in commodities has become as simple as clicking a button.
Fixed income is a very popular asset class as it is seen as less risky than equities. Fixed income is a way to invest in companies that are looking to raise money. They raise money by issuing bonds which you would purchase. This is like making a loan to a company. In exchange for this loan the company will make regular, fixed payments to you with interest. That's why they call it "Fixed Income". It is generally believed that fixed income is less risky because if you agree to loan a company money, they promise to pay it back, whereas stocks do not make such a promise.
Next we have Currencies. In this asset class investors are simply making a bet as to the direction of a particular currency. Now a days you can use an ETF and bet on the direction of all the major currencies, along with some of the emerging market currencies.
Lastly we have Alternatives. Now these get a little tricky, and are usually suggested to be left to the pro's. Adding alternatives to your portfolio allows you to participate in market volatility, or even the shape of the yield curve.
Now you know the different asset classes and their uses. Hopefully this helps categorize the maze of investment opportunities out there.