Types Of Investments
The world of investing is filled with different types of investments. These can range from bonds, mutual funds, individual stocks, real estate, ETFs, closed-end mutual funds, and more. In some cases, this can even including owning a percentage of a business.
In general, stocks are designed to invest in a company’s potential for future growth in the form of its price or dividend %. This information is declared by the company during set dates. In addition to this, shareholders will also get a slice of the pie if a business were to go belly up and was having its assets liquidated. Of course, shareholders do not own these assets.
Shareholders of common stock do possess voting rights at all meetings and can elect to receive dividends once they are set up. While shareholders of preferred stocks do not receive these voting rights but will get to be in front of the line when it comes to dividend payouts. Once again, if the company fails, its assets will be liquidated and a larger share will go to those with a preferred stock in hand.
Bonds refer to investment opportunities that are set up as debt. Investors are able to loan out money to a specific agency/company for a set period of interest payments. They will also receive an additional bonus in the form of a payment if the bond is allowed to mature (reach its set deadline). These can be set up by corporations, municipalities, the federal government, and even specific governmental agencies.
The average corporate bond involves semi-annual interest payments and can be set at a value of $1,000. Please note, these are taxable debt instruments, while anything that is set up by the municipality will be debt exempt. While interest on treasuries will only be taxed federally and not at the state level.
Bonds can be found on the secondary market (similar to stocks) or can be purchased newly. The value of this debt instrument can fluctuate based on the underlying interest rates. If the interest rates go up, the bond goes down in value.
A mutual fund refers to an investment portfolio that is pooled together with several stocks, bonds, and anything else that fits the profile. This is controlled by a respected investment manager and investors are able to pour in money as deemed necessary.
The mutual fund is tallied and accounted for at the end of a trading day including any transactions that have to be completed (buy or sell).
In most cases, mutual funds work alongside bond market indexes such as the S&P 500 or the Barclay’s Aggregate Bond Index to name a few. However, there are other mutual funds that have an investment manager do the heavy lifting where individual stocks are picked out for the portfolio. Please note, there is an added fee for these actively run funds. This has more to do with the expenses that come along with managing the funds.
When it comes to the returns, mutual funds are able to payout in the form of capital gains, interest, and/or dividends depending on the structure. All returns are taxable as long as they are not in a retirement account. Mutual funds can be sold and the return will be based on its price at the time like a stock/bond.
Mutual funds are ideal for those looking to get their feet wet because the risk is reduced with diverse exposure. Most portfolios spread out between 50-100 stocks and that eliminates the risk of one company failing. The portfolio is able to hold its own as long as the market is trending in the right direction. This is a good way to instantly diversify one’s investments.