Different types of Investments

There are many different types of investments and investing styles out there depending on your financial goals and risk tolerance level. Exchange traded funds, mutual funds, bonds and individual stocks are the four most commonly used investment categories.

Stocks

Buying a share of stock means ownership in the company and the gives the share holder the opportunity to participate in the company’s success. When the price of the stock increase or dividends are shared the individual owning the stock benefits. Shareholders, those that own stock, have a claim on the company’s assets. The  stock or shareholder of common stock have voting rights on dividends that the company may pay out.

Bonds

Bonds are different than stock in they are an instrument of debt. an investor is basically loaning money to an agency in exchange for interest payments and the face value of the bond incrementally over time.  Bonds are issued by the federal government, local government agency and corporations. Essentially these entities are borrowing money they need to grow their corporations or build roads for their town, from you and they will pay you pay with interest.   Bonds can be bough at a new offering or they can be purchased on the secondary market.  The most important aspect is the direction of the interest rates, as bond prices move inversely to the direction of interest rates.

Mutual funds

Mutual funds are a bundled security. They are treated as a single unit but compromised of many stocks and bonds and they are managed by an investment manager. Mutual funds are valued at the end of each trading day and any transactions to buy or sell shares are executed after the market close, they are not traded actively though out the day. Mutual funds can passively track indices, a common idex that mutual funds may choose to follow si the S&P 500. Other funds are actively managed, these funds are more expensive but allow the fund manager to be more acitive in rotating individual stocks and bonds in and out of the fund.  The most attractive aspect of a mutual fund is it allows the individual to invest in a portfolio/fund that is comprised of 100 different stocks or bonds at once, this decreases investment risk significantly, because if several of those stocks in the fund do poorly there are still many other stocks that are doing well.  You decrease the risk of losing money..

Exchange Traded Funds (ETFs)

ETFs are very similar to mutual funds, they are a bundled security, but they are traded on the stock exchange.  They can be traded multiple times a day just like a single stock.. Mutual funds are valued once at the end of the day where as ETFs are valued (priced) constantly through out the day. ETFs like mutual funds are comprised of many different security, with different investment objectives, some may passively track an index such as the Russell 2000.  Others may be specifically made up of security only from emerging markets, or only from one specific sector of industry.

Which investment type is right for you depends on your level of activity in the markets, are you trading everyday or having a finacial advisor manage your assets.  And what is your level of risk, how much can you comfortable lose. and what is your investment goals, what are you investing for and how much time do you have to meet this goal?

 

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