When you begin to invest, one of the most difficult decisions you’ll have to make is what kind of investment you want to make. Outlined below are some different types of investments, as well as a description associate with each:
A “Share” in a company. You are purchasing a piece (or many pieces) of a company’s business. As the company grows/shrinks or makes/loses money – the value of your share will increase/decrease respectivley.
If a company goes bankrupt – stockholders take the money that’s leftover after all debts have been paid.
A bond is essentially a loan to a major organization or government that will be paid back in within a certain time period for a premium. Bonds are typically less risky than a stock, however they typically have a smaller return. Many bonds are issued by the government – who in most cases can always pay back the loan.
If a company or government goes bankrupt, bond holders get paid before stock holders.
Exchange Traded Funds (ETFs)
An exchange traded fund is like a mutual fund – in that it is essentially a basket of stocks – however it trades like a stock
ETFs are meant to replicate an index: An example is a Gold Sector ETF – this ETF would contain stocks of many companies who are in the gold business. The value goes up or down depending on how well the entire sector is doing.
ETFs can be as specific as a sector, or as broad as a country. It is possible to purchase an ETF that is a basket of all companies in a country.
ETFs are becoming more popular and recommended to beginner investors.
Mutual funds are a basket of stocks chosen by a Fund Manager in an organization or a bank.
Mutual funds offer diversification in your portfolio without choosing individual stocks.
When you invest in Mutual Funds, you purchase units of the mutual fund at a cost determined by it’s Net Asset Value (NAV).
Mutual Funds don’t typically perform as well as ETFs as they are subject to Management Fees (paying the fund manager) and Marketing Fees (marketing the fund)
Those are basic investment choices. Generally speaking, your investment portfolio should contain a balance of these investments depending on your investment style and tolerance for risk.
I personally wouldn’t purchase units in a mutual fund – although many mutual funds do offer a great return. I would recommend purchasing an ETF over a mutual fund.
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