In my last post, I listed a bunch of options available for savings and investments. Today, I’ll elaborate on your main investing options: stocks, bonds, exchange traded funds (ETFs), and mutual funds. This will be an overview, and you should research what you are going to purchase before just diving into buying any investments.
Stocks
When you buy a stock, you are buying a portion of a company. Publicly traded companies are listed on the various stock exchanges, like the NYSE and NASDAQ. Each company is divided into shares that can be purchased, usually through an online brokerage like Fidelity or Charles Schwab. Investing in individual stocks usually carries the most risk. Individual stocks carry the most risk because stocks of single companies tend to be more volatile than the stock market as a whole, meaning shares of a company are likely to rise and fall more and quickly than the stock market as a whole. Some popular companies that have publicly traded stocks are Microsoft, Amazon, Walmart, Costco, Intel, Pepsi, and McCormick.
Bonds
Basically, bonds are a form of debt, mostly of companies or the government. You can purchase corporate bonds, municipal bonds, and federal government bonds (Treasury Bonds in the U.S.). You don’t have to purchase individual bonds. You can purchase of group of bonds in a mutual fund or exchange traded fund (ETF). One benefit of buying municipal bonds is that the interest payments you receive are usually exempt from federal income taxes. The risk of bonds, and associated interest you’ll be paid, is usually directly tied to a company’s credit rating. The higher the interest rate on the bond, the riskier the bond will likely be.
Mutual Funds & Exchange Traded Funds (ETFs)
Mutual funds are investment vehicles used to invest money into stocks and bonds. A company or fund manager gets money from investors (like you or me) and invests that money in stocks and bonds, creating shares that own a part of the whole fund. More shares are created as more money is given to the fund manager to invest.
The best way to describe an ETF is as a mutual fund traded on a public exchange like stocks. One main difference compared to mutual funds is that ETFs can be bought and sold immediately while the stock market is open, while mutual funds only ‘settle’ once per day, after the stock market closes.
For mutual funds and ETFs, the main types of funds are index funds, sector funds, and niche funds. There are also actively managed funds and passively managed funds as well. Index funds follow an entire index, like the S&P 500, Dow Jones Industrial Average (DJIA), or the NASDAQ 100. Sector funds follow specific sectors within the stock market like technology, industrials, financials, and communication services. Niche funds will seek out specific companies across the stock market to meet a fund’s purpose. Some niche funds hold dividend-paying companies, while others hold stocks specific to certain trends for investors, like alternative energy or marijuana and cannabis.
Next time, I’ll dig into the fees we all pay to invest, and unpack how small differences in investment expenses can have a significant impact on your long term results and size of your nest egg.
DISCLAIMER
Any mention of stocks, bonds, ETFs, or mutual funds is not a recommendation for anyone to purchase them. Always do your own research to make an investment decision or consult a finance professional if you so desire
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