Financial Education
Choose What’s Right for You
Do you know the difference between stocks and bonds? Are you familiar with different types of funds? You don’t have to be an expert to make smart choices for your own investments. But it certainly helps to have some basic knowledge of the underlying investments in your portfolio.
Here’s a brief explanation of the different types of investments:
Stocks
When you invest in stocks, you’re buying shares in a company. The price of a stock generally moves up and down based on the company’s performance and other factors. Some stocks pay out dividends or a distribution of earnings to shareholders in the form of cash payments or additional shares of stock.
To buy and sell a stock, you will typically need an account at a brokerage firm. If you wish to buy or sell stocks, you will tell a stockbroker at the firm what your plan is, and they will follow instructions on your behalf.
Bonds
A bond is basically an IOU issued by a company (or government). Bonds pay investors a predetermined interest rate after a set amount of time. Generally, the lower the risk of default by the bond issuer, the lower the interest rate you’ll earn on the bond.
Entities issue specific bonds based on their type:
- The U.S. government issues treasury bonds.
- State and local governments issue municipal bonds.
- Corporations issue corporate bonds.
Bonds typically have a lower rate of return compared to stocks. However, investing in bonds is less risky than investing in stocks. Investing in bonds has some risks, such as the company your purchase the bond from failing or the government neglecting to honor the bond. Treasury bonds, notes and bills are generally considered safer investment opportunities.
Mutual Funds
A mutual fund includes a collection of stocks, bonds or other investments in one fund managed by an investment manager.
You have two options for managing your mutual fund: active or passive management. In an actively managed fund, you will have a manager pick securities to invest in that will ideally outperform a designated market index. A passively managed fund will track major stock market indexes. Your mutual fund’s risk level will vary depending on your investment choices. However, the risk level of a mutual fund is often much lower than other investment types because of the diversity of your assets.
With mutual funds, you can invest in a diverse range of investments without directly buying stocks or bonds:
- Equity funds invest in stocks.
- Income funds invest in bonds.
Balanced funds include a mix of stocks and bonds.
- Index funds follow market indexes such as the S&P 500.
- International funds invest in foreign companies and assets.
- Specialty funds include investments selected in specific sectors such as health care, technology, real estate or commodities.
Investors make money from a mutual fund when the value of the range of their investments increases. To start investing in a mutual fund, you can go directly through a managing firm and discount brokerage. Before investing, keep in mind that there will be a minimum investment required and an annual fee.
Exchange-Traded Funds (ETFs)
An ETF is a security that holds a basket of assets (stocks, bonds, commodities), similar to a mutual fund. However, an ETF trades like a stock on a stock exchange, with changing prices throughout the day.
ETFs are typically a good investment option for beginner investors because they feature more diversity than individual stocks. Investors can further reduce their risk by choosing an ETF with a broad index. Like mutual funds, investors profit from ETFs by selling them as their value increases.
Real Estate Investment Trusts (REITs)
With a REIT, you can invest in real estate by purchasing shares in a company that owns, operates or finances income-producing real estate. Most REITs are traded like stocks. Another option for investing in real estate is to buy a mutual fund or ETF that invests in REITs.
As an investor, you will want to make sure you carefully review the equity and mortgage properties of a REIT before you make a purchase. REIT shares that heavily rely on mortgage loans may be riskier for investors than shares that focus on equity investments. As mortgage loan rates fluctuate, they can quickly affect the performance of your REIT.
Making money from a REIT investment is similar to earning a profit from stocks. As an investor, you will receive dividends of the company’s profits. Much like stocks and mutual funds, you have the option to sell your share as its marketplace value increases.
5 Basic Investment Considerations
After exploring the many types of investment accounts available, it’s important to consider some factors before any serious investments. The best investment strategies follow five primary investment considerations:
- Consistency
- Simplicity
- Relationship between risks and returns
- Investment objectives
- Diversification
Choose Your Lineup
Investing money always involves some risk, so it’s crucial to choose a portfolio that matches your risk profile, goals and time frame. A well-balanced portfolio may help you manage the risks of investing while helping you stay on track to achieve your goals.
Whether you’re new to investing or want to give your portfolio a checkup, one of our PeoplesWealth Advisors can help. Contact a member of our team today.