There are a lot of different investment options out there and understanding them all
can be tricky. We will give you an overview of several options you can pursue to help
you make the best choice.
Mututal Funds
A mutual fund combines the money of small investors into a single fund. That fund
is then managed by a financial institution or brokerage firm, such as Charles Schwab,
Fidelity, or Vanguard. The financial institution is then responsible for purchasing
stocks, bonds, and other securities on the fund’s behalf.
Benefits of a mutual fund are diversification and liquidity. By contributing to a
mutual fund, you are given a small stake in the investments of the other investors.
This allows you to have a claim in a wide variety of investments without necessarily
having to purchase them yourself. In addition, the cost per transaction is typically
lower than it would be on an individual level.
And just like stocks, you are able to request your shares be converted to cash at
your own discretion.
There are three main types of mutual funds – equity, fixed-income, and money market.
Equity funds are basically mutual funds that invest in stocks. Stock funds are chosen
based on company size, investment patterns, and geographic location.
You can invest in a mutual fund the same way you would most other forms of investment.
You can go to a brokerage firm such as Charles Schwab, Fidelity or Vanguard. You can
also consult independent stock brokers and financial advisers who can set one up for
you. Many banks also offer mutual funds so talk to a financial advisor at your local
institution.
Money Market
A mutual fund combines the money of small investors into a single fund. That fund
is then managed by a financial institution or brokerage firm, such as Charles Schwab,
Fidelity, or Vanguard. The financial institution is then responsible for purchasing
stocks, bonds, and other securities on the fund’s behalf.
Benefits of a mutual fund are diversification and liquidity. By contributing to a
mutual fund, you are given a small stake in the investments of the other investors.
This allows you to have a claim in a wide variety of investments without necessarily
having to purchase them yourself. In addition, the cost per transaction is typically
lower than it would be on an individual level.
And just like stocks, you are able to request your shares be converted to cash at
your own discretion.
There are three main types of mutual funds – equity, fixed-income, and money market.
Equity funds are basically mutual funds that invest in stocks. Stock funds are chosen
based on company size, investment patterns, and geographic location.
You can invest in a mutual fund the same way you would most other forms of investment.
You can go to a brokerage firm such as Charles Schwab, Fidelity or Vanguard. You can
also consult independent stock brokers and financial advisers who can set one up for
you. Many banks also offer mutual funds so talk to a financial advisor at your local
institution.
Bonds
Simply speaking, a bond is a loan. However, the conventional roles of borrowing are
reversed, and you become the lender as opposed to being the borrower. Bonds are typically
issued by the government, state, local municipality, business, or corporation in an
attempt to raise funds for various expenditures.
There are several benefits of bond buying. You can experience higher yields which
is great during periods of declining interest rates. You also have security. When
a company is liquidated, as a bond holder, you can often be given priority over a
stockholder. This makes it easier to receive payment. If you sell a bond before it
matures you are often able to get more or less than your investment due to fluctuating
values. Interest on bonds is usually exempt from state and local taxation, as well
as federal with some cases. Bonds are also great because they are fairly low-risk
investments.
There are several different kinds of bonds you can choose from:
Municipal bonds, commonly referred to as “munis”, and bonds issued by state, cities,
counties, and other government municipalities. These institutions then use the money gained in order
to build roads, maintain sewer systems, and any other project that benefits the public.
Much like municipal bonds, corporate bonds are used to finance a company’s financial
endeavors and responsibilities such as purchasing new equipment, buying back stock, paying shareholders, refinancing debt, etc. Companies categorize their bonds based on the time it will
take for the company to pay back the principal.
These “maturities” can either be short term (less than three years), medium term (four
to ten years), or long term (more than ten years). While long term bonds often offer higher interest
rates, there are also high risks.
Zero-coupon bonds are bonds that are purchased at a significant discount from their
face value. As a result, these types of bonds do not accrue interest during the life of the bond. However,
when the bond matures, the investor will receive the full “face value” of the bond.
Zero-coupon bonds allow an investor who might not have a lot of money to put up front
right away the ability to invest for the future, and allow that money to grow over time. Many zero-coupon
bonds are long term, often having maturity dates ranging fifteen years or more.
Also known as T-Bonds, treasury bonds are fixed interest bonds issued by the U.S.
government. Normally, treasury bonds have a maturity date of at least ten years and interest payments
are paid semi-annually. Treasury bonds are also subject to federal taxes and have a minimum
investment of $1,000.
Government bonds are debt securities issued to support government spending. They are
often referred to as “risk-free” bonds as a result of faith in the government’s ability
to satisfy the debt. However, there have been instances in which the government has had to default on a
loan.
Most bonds can be bought through a brokerage firm. You may be required to have a minimum
deposit if you go this route. Other financial institutions may provide ways of transacting
government securities so check with your local office. You can also purchase government
bonds through a government agency. In the U.S., you can buy government bonds online
from TreasuryDirect which allows you to bypass a broker.
CD's
A CD is a type of savings account that offers a high fixed interest rate for a certain
length of time. It is only after that time (i.e. 6 months, one year, etc.) that you
will be able to access your funds. If you choose to withdraw money before your CD
has “matured” you will incur a sizeable fee. CDs are a great way to save and earn
money. There are many different types of CD’s that come with their own unique benefits.
First you will want to choose the term of your CD. This can be varying lengths usually
1, 3 or 5 years. Then you will want to decide which type of CD you want to invest
in. Lastly, you will want to check with different financial institutions to see which
rates are available and find the one that works for you. Remember to seek out online
institutions as well for more competitive rates.
Since online financial institutions like Ally and Barclay’s often incur lower overhead
costs than traditional banks, they are able to offer higher interest rates on their
financial products and services. Because CDs do not require traditional maintenance,
it is not unusual to purchase a CD from an online financial institution.
While most CDs are purchased through financial institutions, brokered CDs can only
be purchased through a financial advisor or licensed broker. As a result, they tend
to offer a higher interest rate than a traditional CD. However, brokered CDs are often
subject to fees, which can add up over time.
With CDs, you must commit to not touching your money for a fixed period of time. In
most cases, people who put their money into CDs wind up incurring huge penalties when
they withdraw their money ahead of schedule. No-penalty CDs offer more flexibility
and allow you to have more access to your funds in exchange for a lower interest rate.
A liquid CD is the middle ground between a traditional CD and a no-penalty CD. Liquid
CDs offer competitive interest rates and allow you to make a certain number of withdrawals
without a penalty. After the maximum number of withdrawals is reached, you will incur
a fee. Although the interest rates of liquid-CDs are lower than what a financial institution
would pay, they are higher than a savings account.
Callable CDs are traditional CDs that a bank or financial institution reserves the
right to terminate, or “call back”, before the CD has had time to mature. Since people
who purchase these CDs run the risk of not earning interest for the full term, the
interest rates on these CDs are typically higher.
Banks and other financial institutions have recently begun to offer rising rate CDs
– CDs whose rates can rise along with interest rates in an ever-changing economy.
Global CDs combine higher interest rates with a hedge on future changes to the dollar
compared to other currencies.
Banks and financial institutions often use promotional CDs, offering gifts or special
rates, to attract potential investors.
Stocks
A stock is a share in the ownership of a company. Stocks represent a holding on the
assets or earnings of a company. The more company stock you acquire, the more significant
your stake in the company becomes. When you own stock, you become a “shareholder”
and have an extremely small claim to all the company owns.
While stocks, and the ownership they represent, don’t necessarily give you a say in
the daily operation of a company, your stake in the company does grant you the privilege
of being able to vote on board members and other various issues the company may face.
In addition, when a company issues profits to shareholders, you will receive a share.
There are two ways to make money with stocks – appreciation and dividends. When a
stock “appreciates” in value, the stock is worth more than what you had originally
paid for it. Thus, if you were so inclined, you could sell your stock for a profit.
The other method by which stocks can be lucrative are through dividends. Dividends
are payments made to shareholders by a company that reflect the company’s earnings.
Dividends are often paid every three months (quarterly) and allow investors a steady
return so they need not be concerned with the stock’s price in an ever changing market.
However, companies are not required to pay dividends. This is something to consider
when purchasing stock.
There are two types of stocks – common stock, and preferred stock.
Most stocks are issued as common stock. Common stocks indicate partial ownership of
a company and a claim to dividends. Investors are allowed one vote per share when
it comes time to elect board members. Common stocks are usually high risk – a company
can go bankrupt leaving the common shareholders the last to receive money.
With preferred stocks, investors are often guaranteed a fixed dividend. In the event
that a company files for bankruptcy, preferred shareholders are often paid before
common shareholders. However, most preferred stocks are callable and can be purchased
back by the company at any time for any reason.
Stocks are most often purchased through stock brokers who are licensed to purchase
securities on your behalf. Stock brokers can be found by doing a simple Google search
for brokers in your area. They can also be found at brokerage firms such as Charles
Schwab or Fidelity. There are four different kinds of stock brokers ranging from simple
order-takers to full-service brokers.
Online stock brokers are order takers – meaning they follow an investor’s instructions
regarding how they would like to purchase or sell securities. The interaction between
an investor and an online broker is extremely limited to telephone calls and electronic
communication. Since online brokers rarely provide investment advice, reports, and
forecasts, the cost to buy and sell stock is pretty low – and is often calculated
on a “per transaction” basis. Online brokerage firms include E-Trade and ShareBuilder.
Online brokering can be risky since you are not getting advice from a financial adviser.
However, many online brokerages offer advising services at an extra cost.
Discount brokers are similar to online brokers in that they provide extremely limited
assistance. However, online brokers are likely to be more modest when it comes to
“per transaction” costs and often are willing to provide some financial advice for
a fee.
Full service stock brokers are more like traditional stock brokers who take into account
your current financial situation, goals, and factors that will affect your investment
(i.e. marital status, assets, age, income, etc.). Financial planners will also work
with you to establish financial goals (i.e. retirement planning) and budgets. While
these types of brokers tend to be more expensive, they are worth the money.
Money managers are full-service stock brokers who take full discretion over large
portfolios of money. These financial services sometimes act independent of client
interaction but act in the client’s best financial interest. Money managers are extremely
skilled when it comes to finance and therefore charge hefty fees for their services.
Minimum holdings for accounts usually range upwards of $100K.