Getting started with investing can be tough. The variety of investment options and their mechanisms can be daunting to comprehend. This is how I felt when I started. However, I want you to know that investing is not difficult; you just have to understand the basics to begin. Allow me to provide a brief overview of various investment options, enabling you to start your investment journey today. Feel free to ask any questions by leaving them below.
Investing information provided in this blog post is solely for educational purposes. Neither IsaveFuture nor its subsidiaries offer advisory or brokerage services, and we do not recommend or advise investors to buy or sell specific stocks, securities, or other investments.
Stock
A stock, also known as equity, is a security that represents fractional ownership in a company. In other words, When you buy a company’s stock, you’re purchasing a small piece of that company, called a share.
There are two ways stockholders make money:
- Capital appreciation; This occurs when a stock price rises.
- Dividend payments: This happens when the company distributes some of its earnings to stockholders/you.
Now, let’s talk about the risk of stocks. Like any other investment, stocks carry risks since there isn’t a guarantee that you will make money on your investment. Stock prices fluctuate ( the price will go up and down). In most cases, they’ll recover after a fall, but a stock may never recover in some circumstances. However, you can reduce the chance of losses by diversifying.
Bonds
When you buy bonds, you lend your money to the government, municipality, or corporation. In return, the borrower promises you to pay a specified interest rate during the life of the bond and to repay you the principal when the bond matures.
Bonds carriers risk just like any other investment. Some of the risks of bonds are rising interest rates, market volatility, and credit risk. Bond prices rise when interest rates fall and fall when rates rise. Therefore, the bonds portfolio could suffer market price losses in a rising rate environment. Also, Corporate bonds depend on the issuer’s ability to repay the debt, so a default of payment is always possible. Bonds Index funds can lower all these risks because of their diversification, but earnings could also be lower than individual bonds.
Benefits of Bonds
- They provide a predictable income stream.
- Bondholders get back the entire principal when the bond matures. This allows you to preserve capital while investing.
- Bonds can help you offset the risk of stocks.
Bonds carrier lower risk than stocks, but they also carrier lower returns. Many experts recommend including bonds in your portfolio to offset the higher risk of stocks.
Mutual funds
A mutual fund is a company that collects money from investors like you and invests the funds in different types of securities, such as stocks, bonds, or other assets. To illustrate better, Mutual Funds are baskets of companies like Amazon, Google, Tesla, etc. Mutual Funds are great because they give investors like you instant diversification, so instead of having all your money in a single company, the money is spread into many companies. If you buy Mutual Funds with two hundred companies and one of those companies doesn’t perform well, you won’t feel it because the other one hundred and ninety-nine companies in the funds are making you money.
Mutual Funds are actively managed, which means that a professional portfolio manager or team of managers decides which underlying investments to choose for the portfolio. Since someone chooses the investments, the management fees for actively-managed Mutual Funds are typically much higher than passively managed funds.
Index Funds
This is a passively managed Mutual Fund. Passively managed funds are a strategy where a fund manager initially builds a portfolio of investments that seeks to track the returns of a market index, such as the S&P 500. This type of fund doesn’t require any hands-on team of professionals. As a result, the cost is significantly lower than actively managed funds.
ETF Exchange-traded funds
ETFs are very similar to index funds. They are both passively managed baskets of securities that you can buy and sell through a brokerage account. The main difference between index funds and ETFs is that ETFs can be traded throughout the day, like stocks, while index funds can only be bought and sold for the price set at the end of the trading day. Two significant advantages of ETFs are that they have a tax advantage over mutual funds and tend to be more liquid.
