Basics of Investing
Stocks. Bonds. Mutual Funds. Real Estate. Odds are you are going to put some of your hard-earned money into one or more of these investment vehicles at some point in your life. For many people, however, the mere mention of making an "investment' is overwhelming. This article is designed to help you feel more confident by giving you a quick overview of the most common types of investments. For additional help, please contact a Financial Advisor for assistance with your financial planning.
Stocks and Bonds
Historically speaking, the best way to build wealth is to invest in stocks over time. Likewise, there is no safer way to make money than taking some of your paycheck and putting it into bonds. But what are stocks and bonds? And how do they work?
- Stocks are relatively easy to understand because they are simply shares of ownership in a specific company. Basically, a piece of the overall company pie. How much your slice is worth depends on how well that company is doing each day. If the company, is doing well, your stock's value goes up and if the company is underperforming your stock value can go down.
- Bonds, on the other hand, put you in the position of lending your money to the issuing company. The money you "lend" the bond issuer, usually for a fixed period of time, allows the business to purchase assets such as a new building or technological improvements. You typically receive a pre-determined rate of interest and at the end of the term, you are reimbursed your full investment.
One of the most popular ways to own stocks and/or bonds is through mutual funds, often as part of a 401(k) or Roth IRA. Mutual funds offer many benefits to beginning investors because they allow you to diversify your investments by owning shares of multiple companies. Be aware, however, that mutual funds charge fees and can have tax implications.
For many people, real estate is the easiest investment to understand. In addition to owning your home, a rental property can be an ongoing stream of income. Beyond these two obvious choices, another opportunity is called a Real Estate Investment Trust (REIT). A REIT is a company that operates income-producing real estate by using investors' money to purchase commercial or residential buildings. Tenant rents are in turn passed on to you in the form of dividends.
Hedge Funds and Private Equity Funds
Hedge Funds pool money from a limited number of investors and often employ higher risk methods in hopes of large gains in a short amount of time. Alternatively, private equity funds frequently buy financially distressed companies and other long-term investments that they hope mature into big dividends in the future. Both these investments appeal to high-net-worth individuals and often require $250,000 or more to get started.
Investing Actively or Passively?
Active Investments involve the ongoing buying and selling of individual stocks and bonds that seek to profit from short-term market fluctuations. To be successful, this option takes time to research individual stocks and actively monitor performance. Passive Investing simply attempts to match the market's year-over-year performance, and is generally accomplished through funds that track indexes such as the S&P 500 ETF. Because there is little buying and selling involved, fees remain low and don't dig into your profits, however, index funds offer less flexibility and are subject to market fluctuations.
The Botton Line
Whether you choose stocks, bonds, real estate or a combination of investing opportunities, just remember to check out the fine print and educate yourself about the benefits and risks associated with each. In other words, do your homework...it's the best investment advice you'll ever get.