The Instruments of Investing
There are many tools available to you on the path of investing and here are some videos covering a few. Each video below explains, in the simplest form, the details of each investing instrument. Since we are starting out, I will focus on the most common forms of investing until you’re ready to move on to the more exotic and risky forms of investing.
Below, we will cover the following forms of investment vehicles:
- Common Stock
- Preferred Stock
- Mutual Funds
- Exchange Traded Funds
- Index Funds
- Mutual Fund Fees
- Real Estate Investment Trust (REITs)
- Cash Equivalents
- Money Market Funds
- Banks Certificates of Deposit (CDs)
- Savings Accounts
Lets take a closer look – Investing in common stock allows you to experience the ups and downs of a company. While this form of investing can be risky, common stocks have proven to be very successful over time. Notice I said, over time. Throughout history, the market will naturally have highs and lows which can be unpredictable. These can be called times of growth or times of recession. This is the stock market cycle. The stock market’s cycles are called bull (growth) and bear (recession)
Getting Started with Mutual Funds
Although the loss of capital investment is possible with mutual funds and index funds, these group of funds are still considered less riskier than investing in common stock because of their diversity.
– Investor Tip –
When looking to invest in mutual funds, there are 6 major mutual fund objective types.
- Growth Funds – the objective of growth funds is to provide capital appreciation over medium and long term (5 years or more)
- Income Funds – the objective of income funds is to provide the buyer with income over specific intervals. These funds invest in companies that pay a dividend or bonds that provide income.
- Sector/Industry Funds – the objective of these funds allow you to invest directly in a sector or industry that suits you or may be doing well at the moment.
- Cash – Equivalent Funds – these funds invest heavily in securities that a much less risky. These funds may be filled with investment types such as treasury bills and certificates of deposit (CD)
- Target Date Funds – Allows the investor to balance their needs of growth and stability. These funds are created based on a specific future date range. In the beginning, these type of funds will invest a higher percentage of funds in growth stocks while in the later years of the fund it will begin to shift into safer more secure funds for retirement.
- Bond Funds – invest in bonds that provide regular income from interest paid from the bonds they hold.
***Other funds you may find will be a mix of the 6 listed above designed to fit your individual need or strategy
Mutual Fund Fees
What’s the difference?
Now that we’ve learned the first few categories of stock exchange investment vehicles, lets talk about their differences. While there isn’t an absolute right answer, it always best to be armed with enough essential information to make an informed decision. Listening to the videos above and below will help get you there but any other specific research on your decided stock, mutual fund or index will be necessary.
Individual Stocks vs. Mutual Funds and Index Funds
Exchange Traded Funds (ETFs)
Real Estate Investment Trust
Cash equivalents are those instruments that serve as short-term parking places for cash.
Money Market Funds
Bank Certificate of Deposits
Applying what you’ve learned
Now that you’ve learned about the various investment vehicle available to you take a look at all the accounts you have and decide what works best for you. Look at the difference in what you are earning in interest, dividends, appreciation and so on and what you may be paying. If you have debt that has an higher interest rate than what you are achieving in your investment it may make more financial sense to pay that debt down first so that later you can invest fully in the investment of your choice.