When you are just getting started with investments, it can be confusing. You may want to call it quits before you even get started. That’s normal. But don’t fret. We’re here to clarify some of the intricacies that go along with investing to help you pick the right investment for your situation.
Stocks and shares
Companies go from privately owned to publicly owned and traded on a stock exchange. For the early investors of the company, this can mean a nice payout for their support. For the company, it is an opportunity to raise money for future growth and development.
The company is divided like a pie. The public can buy pieces of the company known as shares. Share prices are based on supply and demand. The more people who are interested in investing, the higher the price of the share.
There are two ways to make money with stocks. You can make money when the stock increases in value and you sell your shares or you can earn money through dividends. Dividends are regular payments made to shareholders based on the company profits. These can be paid out in cash or additional stock.
Bonds are essentially a loan that you give to a company or government to finance a new project. For government bonds, that could be better infrastructure. For a company, it could be any unique project.
Bonds eliminate the need for banks. They are cheaper for the borrower as well as offering the lender a higher return on investment than a traditional savings account.
When you enter into a bond, you agree on an annual interest rate. This is repaid to you by a specific date. The interest rate is determined by the risk that the borrower may not be able to repay the loan. The higher the risk, the higher the interest rate.
Selling a bond before its maturity date may yield a profit. If a similar bond’s coupon rate has fallen and buyers are now only getting 5% interest when your bond earns 7%, you may be able to sell yours for more money.
Mutual funds pool together investors’ money in order to buy assets. These can be stocks, bonds, gold, or any hard asset. Investing in mutual funds allows you to diversify in a range of assets. Mutual funds are purchased through your bank, broker, or online. You will earn money from a mutual fund through dividend payments if you hold them for a longer period of time. You may also earn money if they increase in value before you sell them.
Mutual funds can be either passively or actively managed. Actively managed funds are run by a fund manager. He will determine what to invest in and sell the underperforming assets. A percentage of your investment will be used as a fee for management.
A passively managed fund will follow a certain index and mirror what that index is doing. For example, if your fund tracks the FTSE100, an index of the UK’s 100 biggest companies, you’ll own shares in all 100 companies. Your investment will go up and down as the FTSE 100 goes up and down.
Exchange-traded funds, also known as ETFs, allow you to invest in a collection of assets to diversify your risk. ETFs are listed on exchanges with their own symbol and traded over the course of the day just like stocks. For example, the SPY is an ETF that tracks the S&P 500 Index, which is a collection of the 500 largest US companies.
An ETF can contain stocks, bonds, and gold. It can be restricted to one industry or country or spread across many industries and geographic locations. You can purchase ETFs through a broker just like mutual funds.
ETF Investors hope to buy low and sell high in order to earn a profit. Just like stocks, ETFs will also earn you dividends. This is because stocks make up at least part of the ETF portfolio.
Certificates of deposit
Certificates of deposit (CDs) are low-risk bank investments. You loan a bank an amount of money for a set period of time. When that time period ends, you get your principal back plus some interest. The longer the loan period, the higher the interest rate.
CDs are FDIC insured up to $250,000. There are no major risks to investing in CDs, but there are penalties for early withdrawals. Make sure that you won’t need the money during the time you invest in the CD.
Not looking to invest and need money now?
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