Your Choice of Investment Options
As an investor, you have a variety of options to choose from. Which you choose depends on your financial goals, your investment preferences, and your tolerance for risk. Some are suitable for all investors; others are geared more toward the experienced investor.
Stocks
When you buy stock, you're buying ownership in a company. The benefit of owning stock in a company is that whenever the company profits, you profit as well. Typically, investors buy stocks and hold them for a long time, making decisions along the way about reallocating investment capital as financial needs change, selling underperformers, and so forth.
As an investor, you want to make sure that your stock portfolio is carefully balanced among the different types of stocks (domestic, growth, value,international, and so on) and your other investments. A well-balanced traditional portfolio generally offers a steady return of between 5 and 10 percent, depending on the specific investments and the amount of risk you're willing to assume.
Bonds
To raise money, governments, government agencies, municipalities, and corporations can sell bonds. When you buy a bond, you're essentially lending money to this entity for the promise of repayment in addition to a specified annual return. In that sense, a bond is really nothing more than an IOU with a serial number. People in suits, to sound impressive, sometimes call bonds debt securities or fixed-income securities.
Although some entities are more reliable than others bonds generally offer stability and predictability well beyond that of most other investments. Because you are, in most cases, receiving a steady stream of income (the annual returns, for example), and because you expect to get your principal back in one piece (at the end of the bond's life), bonds tend to be more conservative investments than stocks, commodities, or collectibles.
Mutual funds
Simply put, a mutual fund is an investment company. Investors put money into that company, and an investment manager buy securities on behalf of all the investors. Those securities may include various types of stocks, various types of bonds, or both. If you invest in mutual funds, you have thousands of options to choose from, each representing a different mixture of securities.
Because so many shareholders pool their money into each mutual fund, an investment manager can buy a diverse portfolio of securities - much more diverse than most individuals can manage to buy on their own.
Exchange-traded funds
Exchange-traded funds (ETFs) are something of a cross between an index mutual fund and a stock. Although relatively new, they've grown exponentially in the past few years and they will surely continue to grow and gain influence.
Among the characteristics that make ETFs so compelling is the fact that they're cheap. Many ETFs carry total management expenses under 0.25 percent a year. Some of the larger ETFs carry management fees as low as 0.09 percent a year. The average mutual fund, in contrast, charges 1.70 percent a year. ETFs are also tax-smart. Because of the way they're structured, the taxes you pay on any growth are minimal.
Annuities are investments with money-back guarantees: You invest a certain amount of money for a promise that you'll get your money back, with interest, after (or over) a certain time period. That's all that annuities really are - along with enough exceptions, disclaimers, and contingencies to fill a medium-sized law library. Bottom line? The exact nature of the guarantee varies with the type of annuity. In fixed annuity contracts, for instance, your rate of return is guaranteed for a certain number of years. In the latest variable annuity contracts, you can lock in a guaranteed rate of return. With an immediate annuity, you get guaranteed income. - 23208
Stocks
When you buy stock, you're buying ownership in a company. The benefit of owning stock in a company is that whenever the company profits, you profit as well. Typically, investors buy stocks and hold them for a long time, making decisions along the way about reallocating investment capital as financial needs change, selling underperformers, and so forth.
As an investor, you want to make sure that your stock portfolio is carefully balanced among the different types of stocks (domestic, growth, value,international, and so on) and your other investments. A well-balanced traditional portfolio generally offers a steady return of between 5 and 10 percent, depending on the specific investments and the amount of risk you're willing to assume.
Bonds
To raise money, governments, government agencies, municipalities, and corporations can sell bonds. When you buy a bond, you're essentially lending money to this entity for the promise of repayment in addition to a specified annual return. In that sense, a bond is really nothing more than an IOU with a serial number. People in suits, to sound impressive, sometimes call bonds debt securities or fixed-income securities.
Although some entities are more reliable than others bonds generally offer stability and predictability well beyond that of most other investments. Because you are, in most cases, receiving a steady stream of income (the annual returns, for example), and because you expect to get your principal back in one piece (at the end of the bond's life), bonds tend to be more conservative investments than stocks, commodities, or collectibles.
Mutual funds
Simply put, a mutual fund is an investment company. Investors put money into that company, and an investment manager buy securities on behalf of all the investors. Those securities may include various types of stocks, various types of bonds, or both. If you invest in mutual funds, you have thousands of options to choose from, each representing a different mixture of securities.
Because so many shareholders pool their money into each mutual fund, an investment manager can buy a diverse portfolio of securities - much more diverse than most individuals can manage to buy on their own.
Exchange-traded funds
Exchange-traded funds (ETFs) are something of a cross between an index mutual fund and a stock. Although relatively new, they've grown exponentially in the past few years and they will surely continue to grow and gain influence.
Among the characteristics that make ETFs so compelling is the fact that they're cheap. Many ETFs carry total management expenses under 0.25 percent a year. Some of the larger ETFs carry management fees as low as 0.09 percent a year. The average mutual fund, in contrast, charges 1.70 percent a year. ETFs are also tax-smart. Because of the way they're structured, the taxes you pay on any growth are minimal.
Annuities are investments with money-back guarantees: You invest a certain amount of money for a promise that you'll get your money back, with interest, after (or over) a certain time period. That's all that annuities really are - along with enough exceptions, disclaimers, and contingencies to fill a medium-sized law library. Bottom line? The exact nature of the guarantee varies with the type of annuity. In fixed annuity contracts, for instance, your rate of return is guaranteed for a certain number of years. In the latest variable annuity contracts, you can lock in a guaranteed rate of return. With an immediate annuity, you get guaranteed income. - 23208
About the Author:
Multiple streams of income is the way of the future. Investing is just one way to help create those streams. How to Invest Today helps give you those skills you need to invest. How to Invest Today is a place to learn and keep up with investing daily. Information is key to being a good investor. How to Invest Today
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