Learning the basics of investing is like learning a new language. Whether discussing stocks, bonds, and other investment vehicles, it's no wonder many beginning investors feel like they're in uncharted waters. The good news is that once you have mastered the language and certain investing basics, you'll better understand how much of this works. To assist you on that journey, here is a look at the handful of the most common types of investments you will encounter in your lifetime.
- Mutual Funds
Without a doubt, owning stocks has been the best way historically to build wealth. Stocks are pretty simple: they're shares of ownership in a specific company. When you own a share of Apple, for example, you own a tiny piece of that company. Stock prices fluctuate with a company's fortunes, and also with the economy at large.
- A stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation.
- Corporations issue (sell) stock to raise funds to operate their businesses. There are two main types of stock: common and preferred.
- Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and they are the foundation of nearly every portfolio.
- Historically, they have outperformed most other investments over the long run.
And for more than a century, investing in bonds has been considered one of the safest ways to make money. But how do these investments work? Buying a bond issued by a company means you're lending money to that company, which it can use to grow the business.
- Bonds are units of corporate debt issued by companies and securitized as tradeable assets.
- A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common.
- Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
- Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.
One of the most popular ways to own stocks and/or bonds is through mutual funds. It’s a pooled fund that is intended to invest in the capital markets and money markets to generate a return to the shareholders.
Mutual funds offer many benefits to investors, particularly to beginners who are just mastering investing basics. They're pretty easy to understand and allow you to diversify your investments over more companies.
- A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds or other securities.
- Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.
- Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
- Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns.
- The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds.